April 20, 2013

March Employment in Rhode Island: How Worlds Diverge

Justin Katz

Watching the employment statistics, as presented by the federal Bureau of Labor Statistics (BLS) from month to month, offers an interesting perspective on how people can develop different understandings of objective reality.

Tracing the unemployment rate, one might think Rhode Island is undergoing a strong recovery. In January 2010, it was 11.9%, and for years the state was among the worst three, periodically claiming the lead spot. This past March, though, the rate was 9.1%, which puts five other states in a worse position.

But viewing the statistics in terms of employment, not unemployment, changes the picture entirely.

April 5, 2013

Notebook Entry: "Secretary of Commerce vs. RICWFA paradox"

Carroll Andrew Morse

A brief exposition of an entry put down in an actual dead-tree notebook, referring to a news-subject worth watching, at a time where there is certainly no shortage of subjects vying for public attention...

Secretary of Commerce vs. RICWFA paradox -- A group of Rhode Island leaders led by General Treasurer Gina Raimondo announced a plan in late March to help Rhode Island municipalities secure low-interest loans for infrastructure projects through the quasi-public Rhode Island Clean Water Finance Agency. At about the same time, the Rhode Island Public Expenditures Council pitched to the House Finance Committee its plan to move a chunk of the the quasi-public Economic Development Corporation's function to a Secretary of Commerce position situated inside of the Governor's office. This seems, at least on the surface, to have things a bit backwards, with a quasi-public organization assuming a significant role in providing a public good, i.e. maintenance of roads and bridges, while the government-proper devotes more energies to "economic development", most of which ultimately must happen outside of government.

According to WPRI.com's Ted Nesi, "the treasurer's office estimated communities could save $1 million on every $10 million in loans thanks to the lower rates they'd get by borrowing through the AAA-rated [RICWFA]", but the ability of a city or town to pay off debt doesn't change because it takes a new route to get a loan, and adding a new middleman isn't a guaranteed method for lowering the cost of something. It is fair to ask if there's a more fundamental issue with RI cities and towns paying more than they need to for lending, if someone else will be assuming risk of default in RICWFA routed loans, or if there's some other cost to this plan that's not immediately obvious.

April 3, 2013

Minimum Wage Workers and the Threat of Increases

Justin Katz

A quick update study from the RI Center for Freedom & Prosperity finds that legislative proposals at the state level to increase the minimum wage to $8.25 per hour would cost workers in the state 432 jobs, measured against last year's $7.40 per hour rate.

Even worse would be the proposal suggested by U.S. Congressmen Jim Langevin and David Cicilline to increase the national minimum to $10.10. That would cost 3,466 Rhode Islanders their jobs.

In a press conference this morning, replayed in large part by Dan Yorke on 630 WPRO, the Congressmen presented the image of struggling families working full time in minimum wage jobs just to subsist. That is simply not the profile of this group of people.

March 21, 2013

The Three Ts Are Proving to Be About Ruling Class Insulation

Justin Katz

What are Governor Lincoln Chafee's three Ts of economic development, again? Is it talent, technocrats, and tolerance? Or is it technology, tolerance, and twee ideological fashion? It can be so difficult to keep these gimmicky strategies straight.

This particular strategy is also turning out to be difficult to make work. In fact, it may just be a description of a handful of cities that chance made "hip," rather than a workable, replicable strategy for turning around any given city. Indeed — as should probably be expected when we give broad authority to powerful people to plan the society in which everybody will live — it appears that pursuing a "creative class" strategy tends to produce the sorts of communities that serve powerful people and the cool folks with whom they like to hang out.

March 20, 2013

Rhode Island Changed Last-Place Unemployment Partners in January

Justin Katz

The message making the rounds on Rhode Island's January employment numbers is that it represented a slight, if mixed, improvement, because the unemployment rate fell to 9.8%, the lowest it's been since early 2009. A large reason for that fact, however, is that a methodological revision by the U.S. Bureau of Labor Statistics made more people disappear from the Rhode Island labor force than it did from the employment rolls.

Now, the January numbers show another large drop in the labor force, nearly 1,400 people, thus "improving" the unemployment rate, even though actual employment fell for the first time since September 2011. The reason is that only 681 fewer people reported being employed. That's quite a different picture from Rhode Island's new partner in last place for unemployment, California. The latter has continued to add employment, but people entering and/or returning to the labor force have kept its unemployment rate from going down.

March 11, 2013

A Revision in Time Saves 1600

Justin Katz

In George Orwell's 1984, the protagonist, Winston, begins to notice the import of the revisions that he makes to news and history as an employee of the Ministry of Truth. No fact is so set in stone that it can't be made to look better through revisions of the past.

In the real world, nationally, as well as locally here in Rhode Island, the newspapers have been touting the lower unemployment rates. Somehow the massive revision of the numbers and change of the methodology have gone sparsely mentioned.

January 4, 2013

Concluding a Strange Season for Employment Data

Justin Katz

An unanticipated (unprecedented) leap in employment just prior to this year's presidential election brought the Current Population Survey (CPS) data from the Bureau of Labor Statistics (BLS) an unusually high degree of technical scrutiny. As I've been noting, the seasonally adjusted and unadjusted results have been a bit peculiar. With data from December now available, the BLS concluded the year by changing five years' worth of seasonal adjustments and announcing changes that will make subsequent years "not directly comparable" to anything that came before.

For the final month of the year, the "headline" unemployment number, which is the percentage of people in the labor force who say they are actively seeking work, held at 7.8%. Two frequently highlighted considerations are that, one, certain demographic groups are way above that percentage and, two, the rate would be significantly higher if the American labor force hadn't slowed its pace. If the labor force of the last five years had continued to grow at the rate of the prior five years, the unemployment rate would be 8.6%.

But it's the difference of seasonal adjustment that illustrates the peculiarity of this year.

December 27, 2012

November Employment: Rhode Island's Peculiar Growth Abates

Justin Katz

After two months of unexpectedly strong employment growth, Rhode Island's surge abated. Unemployment held at 10.4%, leaving the state at second worst in the nation, with Nevada rapidly making up the distance, and the number 3 California finally slipping below 10%.

According to survey data released by the U.S. Bureau of Labor Statistics, the pace at which increasing numbers of Rhode Islanders say that they are working fell to about a third of what it had been for September and October, to 1,501. Meanwhile the labor force increased by 1,411.

December 17, 2012

Things We Read Today (42), Weekend

Justin Katz

The lesson of current events and history; what the 2nd Amendment means; what that means for change; government control and healthcare insecurity; government control and economic stagnation; a couple positive notes.

State Comparisons: Right to Work and Beyond

Justin Katz

A stunningly biased article by AP writer Jeff Karoub on the front page of today's Providence Journal likely captures the attitude of most in the Rhode Island media on the issue of right-to-work legislation, as enacted into law in Michigan, yesterday:

The GOP-dominated House ignored Democrats’ pleas to delay the final passage and instead approved two bills with the same ruthless efficiency that the Senate showed last week. One measure dealt with private-sector workers, the other with government employees. Republican Gov. Rick Snyder signed them both within hours, calling them “pro-worker and pro-Michigan.”

Yes, that plea-ignoring, ruthless GOP. Not mentioned in the article, in the paper, or in any mainstream RI media that I've seen was reportage of a unionist mob tearing down a large tent set up by Americans for Prosperity, while bystanders plead with them to stop because people were inside, and physically attacking a conservative commentator, after a Democrat legislator promised that "there will be blood."

The Projo's reporters are a unionized subset of the AFL-CIO, after all.

December 8, 2012

Mortgaging the Economy

Marc Comtois highlights another fascinating glimpse into the reasoning behind policy ideas that he and I agree are, well, in error. I'm speaking of this paragraph from Slate's Matthew Yglesias:

... I'm especially enthusiastic about the mortgage part. Suppose homeowners in expensive coastal cities couldn't deduct their mortgage interest, what would happen? Well, what would happen is that prices would fall. But nothing more dramatic than that. All the deduction does is encourage further bidding up of the price. In a normal market, that bidding up of the price might lead to additional construction. But the main reason those blue metro areas have such expensive houses is that zoning doesn't allow demand to be matched with supply. No matter how expensive Georgetown or Harvard Square or Park Avenue gets they're not demolishing the existing structures and replacing them with much larger ones. So you'd get some extra tax revenue this way with no real change in the amount of underlying economic activity.

Look, I've been known to make statements about the effects of policies that are arguably over-confident, but at this level of detail, human behavior has a definite x-factor of which policymakers (and policy-propounders) should beware.

December 7, 2012

The Philosophy of Noose Tightening

Justin Katz

Providence Journal opinion columnist M.J. Anderson offers a fascinatingly candid look at the thought processes of those whose preference for expressing concern for people is through government programs, and at how it ultimately makes a cheap trinket of freedom.

The bulk of her column describes the terrible dynamic of ObamaCare that is leading employers to shift their emphasis toward part-time workers so as to avoid the choice that the federal government has given them: pay for expensive health plans or pay a penalty. ObamaCare sets a threshold of 50 employees working 30 hours or more per week before the mandate kicks in. As with minimum-wage laws, the rest is basic math and economic incentive.

Folks who share my philosophical view of the world look at this situation and see an argument against ObamaCare.

December 3, 2012

Open Thread: The Rhode Island Economic Development Corporation

Carroll Andrew Morse

Philip Marcelo of the Projo reported last week that...

Governor Chafee said on Friday that he is not considering major changes to the state Economic Development Corporation, despite a state-commissioned report calling for a major overhaul of the embattled agency, which came under fire for its handling of the 38 Studios debacle.

I know every other state has some sort of economic development body (RIPEC provided a summary of them, at the end of its report on the RI EDC issued earlier this year), but what exactly is it that an "economic development agency" is supposed to achieve?

The question isn't whether government should be involved with economic development; one way or another it will be. As Justin pointed out earlier this year, during his Ocean State Current coverage of a non-profit/business community get-together, there is a strong perception from people who are trying to do economic stuff that the major way in which government is frequently involved in the current RI economy is as something that needs to be worked around. This leads to a first question: can an economic development agency make any difference with a government as broken as Rhode Island's is?

The other question is more fundamental: Even under as reasonable as can be hoped for conditions of good government, what exactly is it that a mission-specific economic development agency can do (whether as a quasi-public agency or as a regular government department) to bring about more improvement in the Rhode Island economy that directing the same level of "resources" (i.e., moolah) to more fundamental functions of government cannot?

Ted Nesi, in his Saturday morning post for WPRI-TV (CBS 12), recalled that the RI Department of Economic Development, the forerunner to the current Economic Development Corporation, was only created in 1974. The state got by without one for several centuries. Could it do so -- could it even be advantageous to do so -- again?

The Unmentionable Solution to the Fiscal Cliff

Justin Katz

Watch public policy even for a short while and the trick becomes evident. Whether we're talking my hometown of Tiverton, Rhode Island, (population 15,780) or the federal government, the maneuver is to claim increasing amounts of power and make sure that's the one thing not on the table when something has to give.

Thus, we get massive government interwoven like a terrible tumor around the vital organs of our economy. When the predictable illness follows, the two operations suggested, as if in opposition, are cuts on the spending side and increases on the revenue side.

Either, we're told, is apt to drive the patient into shock. The government can take money out of the economy through taxes, or it can stop putting money into the economy via cuts. That's not much of a choice.

November 23, 2012

Free Market Argument for Copyright Reform

Marc Comtois

There was a bit of a controversy earlier this week when a policy brief from the Republican Study Committee was released advocating for major copyright reform with regards to intellectual property--and then it was "unreleased". The reasoning given was the the report was actually not properly vetted, whereas the belief amongst many was that lobbyists--such as the Motion Picture Association of America and the Recording Industry Association of America--got to the GOP.

As Lisa Shuchman reports, Rep. Darrell Issa, who was a strong opponent of SOPA, is regarded as someone with both the pull and desire to get something done on this front.

“The bad news for the movie studios and record companies is that the discussion about how to make copyright law make sense in a digital age has already started in Washington, and it will continue, with our without them,” Gigi Sohn, an attorney and president and co-founder of the public policy non-profit Public Knowledge, wrote in her blog.

Indeed, Public Knowledge and others advocating for change to the copyright system have at least one ally in Congress. Rep. Darell Issa, who sits on the Judiciary Committee and its Intellectual Property, Competition and the Internet Subcommittee, wrote on his Twitter account Monday that the report was a “very interesting copyright reform proposal” and "It's time to start this copyright reform conversation."

The Congressman, who emerged as a leader on issues related to Internet rights earlier this year when he opposed the Stop Online Piracy Act (SOPA), has already said he plans to make digital rights a priority in the new Congress.

So, while it's not "official", here is the brief in full. And, to give you some flavor, here is the conclusion, which argues for reform based on free-market principles.:

To be clear, there is a legitimate purpose to copyright (and for that matter patents). Copyright ensures that there is sufficient incentive for content producers to develop content, but there is a steep cost to our unusually long copyright period that Congress has now created. Our Founding Fathers wrote the Constitution with explicit instructions on this matter for a limited copyright – not an indefinite monopoly. We must strike this careful Goldilocks-like balance for the consumer and other businesses versus the content producers.

It is difficult to argue that the life of the author plus 70 years is an appropriate copyright term for this purpose – what possible new incentive was given to the content producer for content protection for a term of life plus 70 years vs. a term of life plus 50 years? Where we have reached a point of such diminishing returns we must be especially aware of the known and predictable impact upon the greater market that these policies have held, and we are left to wonder on the impact that we will never know until we restore a constitutional copyright system.

Current copyright law does not merely distort some markets – rather it destroys entire markets.

There is much more free-market based reasoning within the brief. As they say, read the whole thing (it's only 9 pages!).

November 21, 2012

To Starve or Gorge the Beast?

Marc Comtois

"[W]e've got to reduce spending before we can reduce taxes. Well, if you've got a kid that's extravagant, you can lecture him all you want to about his extravagance. Or you can cut his allowance and achieve the same end much quicker. But Government has never reduced. Government does not tax to get the money it needs. Government always needs the money it gets." ~ Ronald Reagan

Hence was born the idea of "starve the beast," a conservative core belief if ever there was one. But is it true? As explained in a recent column by Andrew Ferguson, economist (and libertarian) William Niskanen didn't think so.

Beginning in 2002, Niskanen published a series of papers and op-eds about tax cuts and spending increases that turned conventional conservative wisdom on its head....If we wanted a smaller government, he said, we would have to raise taxes....Niskanen, looking over 25 years of budget data, noticed something about STB ["Starve The Beast" ~ ed.]: It didn’t work. In fact, attempts to starve the beast by tax cuts seemed to lead to increased federal spending.

Niskanen looked at both spending and taxes as a percentage of GDP. On average, he found, if federal revenues declined by 1 percent, federal spending increased by 0.15 percent. When revenues rose, on the other hand, relative spending decreased. A further study in 2009 by another Cato economist, Michael New, came to the same conclusion after the gluttonous administration of George W. Bush. Under Bush and his mostly Republican Congress, new benefits like subsidized Medicare drugs and increased federal education spending followed on the heels of large tax cuts.

Niskanen’s explanation for the failure of STB was straightforward, a conjecture based on standard economics: When you cut the price of something, demand for it will increase. Lowering taxes without lowering benefits meant that taxpayers were getting the benefits at a discount. The government made up the true cost with borrowed dollars that future taxpayers would have to repay. There was a big difference, Niskanen said, between a kid on an allowance and the federal government: The government has a credit card with no debt limit. {emphasis added}

That last--the ability of government to write checks on credit--was overlooked by STB advocates.

[E]arly advocates of STB had counted on something that never materialized. They had assumed that as the debt piled up to finance annual budget deficits caused by free-flowing benefits, public outrage would force politicians to restrain spending without raising taxes. Yet we’ve had the deficits and the borrowing, in amounts that would have left Friedman and Reagan agog; what’s been missing is the outrage.

People aren't outraged because they don't feel the immediate pain of increasing government because the money for government expansion is either borrowed or paid for by increasingly fewer individuals. So around 50% of the population feels no pain (they don't pay income taxes) while a majority of the rest pays relatively minimal amounts. And a lot of that pain is left to future generations. This aligns with Niskanen's reasoning for why higher tax rates lead to lower spending:

“Demand by current voters for federal spending,” he explained, “declines with the amount of this spending that is financed by current taxes.” When you make them pay for government benefits out of their own pockets, in other words, voters will want fewer of them. The journalist Jonathan Rauch put Niskanen’s point more pithily: “Voters will not shrink Big Government until they feel the pinch of its true cost.”

Yet, as I mentioned, not everyone shares the tax burden evenly in our progressive income tax system. So, perhaps a flat tax would prove or disprove Niskanen's theory, but it's doubtful that will happen any time soon.

Ferguson's article brought some critiques of Niskanen's ideas. Noah Glyn offers up another reason for why government spending decreases when tax revenue increases:

[It's] the business cycle. As the economy grows, people earn more so they pay more in taxes; conversely, when the economy enters a recession, government revenue plummets. During recessions, however, the public relies on increased government spending, in the form of Medicaid, food stamps, and other transfer payments. (This can go the other way, too: Some state and local governments have used economic growth to justify increasing promises to government employees’ pension plans, but those costs typically come much further down the line.)

This is buttressed by Ramesh Ponnuru's important, technical point and "thought experiment":

Let’s say we still had the Clinton-era tax rates and a (smaller but still quite large) long-term debt problem. Wouldn’t we be debating an increase in tax rates to a higher level than we are now? That seems to me pretty likely. The baseline from which we’re negotiating would be higher, perceptions of what’s tolerable would be higher, expectations of tax rates would be higher. On the Niskanen theory there would be a countervailing effect: In the interim the tax cuts caused spending to be higher and thus moved the spending baseline higher. But Niskanen didn’t find that a dollar of tax cuts were associated with a dollar of spending increases; he found that a 1 percent reduction in revenue over GDP was associated with a 0.15 percent increase in spending over GDP. So the countervailing effect would be smaller.

I always liked Niskanen’s argument, even if I didn’t quite find it persuasive. One thing that always bugged me about it which, to my surprise, Ferguson doesn’t mention, is the implicit assumption that Americans behave like rational economic actors with regard to what they get from government....The American species of homo economicus has been paying hundreds of billions to get rid of poverty for decades, what do we have to show for it? Poverty rate in 1975: 26 percent. Poverty rate in 2010: 26 percent. What a great return on the investment. Federal spending on education? Ahem...For reasons, good and bad, voters don’t treat tax dollars the way they do their own dollars. They don’t demand quality. They don’t demand accountability. They don’t push for efficiency. Many people think the government should spend money as if it comes from someplace other than the wallets of citizens and that what we get for it should be graded on some spiritual, emotional, philanthropic or metaphysical curve. How we spend for X so often seems to matter more than how much X is actually delivered.

Yet, as Patrick Brennan argues, re-stating Niskanen's implicit premise, the missing demand for government quality is because so many have so little stake in the game.

People might be a lot more likely to start caring about where their tax dollars go (whether the ends are efficient and whether the money comes back to them) when those taxes are really substantial, broad-based, and they actually have to pay them.

Brennan also compares U.S. expectations for government services to that of Europeans:

If you live in a society where, as Jonah pointed out Arthur Brooks has argued, the state is considered the main conduit for meeting societal needs and caring for the poor and vulnerable, you’ll care more about how well government works and whether it can care competently for you, and that’s a cultural matter. But it’s also important to homo economicus, because Leviathan has taken most of his paycheck, and he now has to hope, and should ensure, that government will provide for society at large, the poor and vulnerable, and even him at times, and do so as efficiently and competently as possible.

There are obviously other explanations for these differences: Charlie Cooke has lamented to me on many an occasion that in Britain, the conversation about almost all government policies ends up being debates over efficacy of programs, not whether the programs should exist in the first place. Leaving aside the financial constraints Britain and elsewhere are now experiencing, if you don’t have a constitution with enumerated federal powers, a truly conservative and independently minded political movement, etc., you’re going to spend more time on making government work, not on making it smaller, and that’s for other reasons than I’ve just proposed.*

Regarding the last, many conservatives (well, at least me) believe that a smaller government is one that is easier to make workable!

==========================
* Brennan expounded on the point later in the post: "It’s difficult to assess my thesis inasmuch as big government and the cultures that give rise to it have other negative effects on efficiency, so it’s possible citizens subject to a huge government and a regressive tax code get a more efficient government than they would if they didn’t have higher expectations than free-riding Americans, but still not a very efficient one. It’s been suggested, in fact, that it’s highly efficient yet regressive taxation (like light capital taxation, competitive corporate-tax rates, consumption taxes, etc.) that’s allowed places such as France and Scandinavia to have functional economies despite the burdens of absurdly large governments; perhaps it’s also the relative efficiency and usefulness of their government spending programs, and not just their tax system, that’s allowed them to manage as well. Thus again, economic preferences force the hand of citizens and politicians in a completely government-dominated society but not in one like America."

November 19, 2012

Inefficiency in Economic Development: Money Looking for Makers

Justin Katz

Readers of Philip Marcelo's article, in today's Providence Journal, about restoration of the historic-structure tax credit program in Rhode Island should see some warning signs indicative of a broader flaw in government economic development:

... the national recession and a 2008 moratorium on the tax-credit program brought such projects to a near halt.

Dozens stalled or never got off the ground, leaving around $150 million in credits –– which can be redeemed to offset business and personal income taxes — still pending final approval. ...

Millions of dollars more in credits also could become available, if developers do not meet a May 2013 deadline to show some progress on their projects. (A project must be fully completed and its expenses reviewed before state officials approve issuing credits.)

October 29, 2012

During Hurricane Sandy, Rhode Island Vendors Should Watch Their Prices

Justin Katz

With the declaration of emergency for Rhode Island, Hurricane Sandy becomes the first instance in which a new law, passed by the Rhode Island General Assembly and signed by the governor this spring, goes into effect. H7409 (also S2606) outlaws price gouging during an emergency. In the heat of the experience, the adrenaline of survival pushes the consequences of public policy even farther out of the public consciousness than its usual peripheral place. Still, as we hunker down — with school canceled and government offices closed well in advance of the looming weather — interest in the storm creates an opportunity for education and debate.

October 25, 2012

... proffered in today's Providence Journal by the challenger in the House District Four race.

Asked about his own solutions, [Mark] Binder linked Rhode Island’s high unemployment, in part, to the large number of people who can’t get work because they are required to disclose their criminal histories on job applications. Binder told his audience at Laurelmead that he heard this story often in talking to unemployed people in the Camp Street area of Providence and believes the state should make it “so these guys don’t have to check that box” on an employment application.

It could only be good for the government reform effort in the state to have a Democrat Speaker toppled. In this case, that would involve a victory by Mark Binder. That does not, however, obviate the necessity to ask the almost painfully obvious question here: how does Mr. Binder's theory explain the situation of the vast majority of the unemployed in the state who, you know, lack a criminal background?

October 22, 2012

An Unexplected Surge in Employment

Justin Katz

The national political scene saw quite a stir, the first week of October, when the Bureau of Labor Statistics (BLS) reported a huge jump in employment and corresponding drop in the unemployment rate. As I noted at the time, a large percentage of the increase was attributable to people who are involuntarily working part time, rather than full time.

More curious, though, is that August-to-September is not typically a time for large increases. The September-to-October month is the one that brings a boost in hiring. That fact is usually obscured by the seasonal adjustment by which the BLS smooths the month-to-month results in order to highlight actual trends, but the not-seasonally-adjusted chart at the above link tells the tale.

This factor appears to be in play in the state data, too, especially in Rhode Island. In nine of the last twelve years, employment has dropped in September, before seasonal adjustment. And September has never increased by the 5,229 people reported in this year's results.

October 18, 2012

Rhode Island Economy Booming! Or Not.

Justin Katz

According to a press release from the RI Department of Labor and Training — the last to report this data before the election — Rhode Island's unemployment rate dropped to 10.5% in September, its lowest level since April 2009. The change was on the strength of the state's " largest monthly increase of employed RI residents since the Bureau of Labor Statistics implemented the current methodology in 1976."

Did it feel as if Rhode Island's economy took off at an historic rate, last month?

October 15, 2012

Deregulation Isn't the Problem; Bailouts Are

Justin Katz

Travis Rowley takes on the talking point that the "Bush tax cuts" and the deregulatory impulse are what (say it with me) got us in this mess in the first place. The core of the argument goes to those government-sponsored enterprises (GSEs) that backed mortgages for lower-income families:

Whenever Democrats cite “the failed policies of the past” in order to refer to Republican promises to loosen up government guidelines placed on private enterprise, they are purposely confusing plans to deregulate the marketplace with the lack of oversight on Fannie Mae and Freddie Mac – government-sponsored agencies (GSEs) that prominent Democrats sought to protect from Republican reforms.

As early as 2001 the Bush administration was warning that the size of Fannie Mae and Freddie Mac was a “potential problem” that could “cause strong repercussions in financial markets.” And Congressman Ron Paul (R) spoke of an existing real-estate bubble, and predicted that it “will burst, as all bubbles do.”

Put differently, it wasn't the deregulation that caused the problem; it was the promise of bailouts if things went wrong. As I've pointed out in variousparts, Fannie and Freddie became an alternative to government debt for a safe investment at a time when the stock market was creating more prospective money than even existed in the gross domestic product (GDP). ...

October 13, 2012

Government Debt and the Danger of Historical Growth

Justin Katz

In today's Saturday column,Ted Nesi voices reasoning that is only possible in a society that's become hubristicly accustomed to economic growth as an inevitability:

If bond investors are offering Rhode Island the lowest interest rates in its history, shouldn't the state be borrowing more money right now? Gina Raimondo has hinted she’s thinking that way, and there are plenty of infrastructure projects that need to be done soon. Some people are opposed to any and all state borrowing, and that's fine – but if you're someone who acknowledges Rhode Island taxpayers will be borrowing money at some point over, say, the coming decade, shouldn't as much of it be borrowed as possible now, while interest rates are at historic lows and 10% of the state's workers are idle?

This is akin to the approach of a college student who lives beyond his means on credit, expecting the sort of paycheck that he's been told to expect ...

October 5, 2012

Employment: October Surprise or October Miracle?

Justin Katz

A lot of people who watch policy and politics relatively closely were very surprised, this morning, to hear that the unemployment rate had fallen to its lowest level during the Obama presidency — a level last seen in January 2009. As James Pethokoukis notes, of the seasonally adjusted 873,000 jump in employment from August to September, 582,000 were people who want to work full-time but had their hours cut or were unable to find full-time work, involuntary part time, as they're called.

Given the sheer size of the jump in employment, though, some cynical folks on the political right are finding it to be a bit suspicious. In their view, the move would be in keeping with the Obama administration's request to defense contractors not to notify employees before the election of possible layoffs and promise to cover the cost if they are sued for it.

Obama's Economic Claims Debunked

October 2, 2012

Things We Read Today (22), Tuesday

Justin Katz

Economic development options, from all-government to government-dominated; the heartless-to-caring axis in politics; Southern New Englanders' "independence"; solidarity between Romney and his garbage man; the media coup d'etat.

October 1, 2012

Feeling Good On Monday Morning

Patrick Laverty

I think back to the old Southwest Airlines commercial (see it) advertising the all the great things about Philadelphia, including the cabbie proclaiming "Well there's a lot, a lot of culture here" and then all the other people in the commercial just proclaiming the greatness of the cheesesteak. Sometimes, I feel like people here in RI do the same when talking about why Rhode Island is a great state. We have the beaches, we have umm, Boston and New York are nearby. Oh, there's the restaurants, and of course we have Del's slushy lemonade. There you go, case closed, I've made my case for why Rhode Island is such a great place, why we're all here and why everyone else should consider coming here.

Just in case we needed the other view point in one concise web site, we now have that. The state's Republican Party launched RIRankedLast.com. Some of the things to enjoy with your morning Cheerios can include the state's rankings in various surveys like our dismal unemployment statistics, cost for education and a comparison to its effectiveness, our infamous business climate, and one for all the people who have sought fit to keep the Democrats in one-party rule for pretty much their whole lifetime: RI is the 7th worst state to retire in. How's that one grab you? You've been voting Democrat for the last 40-45 years or so, you're finally getting ready to retire and the fruit of your labor is non-existent. Abysmal. About the only thing you can do is start scouring the internet for your new home in the Carolinas or Florida, like everyone else. You helped create this environment and when it isn't working out for you, you flee, leaving it for the rest of us to try to clean up. It's like using the toilet and neglecting to flush.

Anyway, crude allusion aside, the web site has other information like links to all the recently convicted politicians we've been able to enjoy as well as lists of alternatives to consider next month.

It's sad that such a site is necessary and maybe even this isn't enough to get the message across to people but hopefully it'll at least get some people thinking about whether it really is true that "Yeah, the Assembly is a bunch of scumbags, but I like my guy. My guy is good!" We'll see in about another 37 days.

September 27, 2012

RIPEC's EDC Report Another Indication of the Question Not Asked

Justin Katz

Yesterday, the Rhode Island Public Expenditure Council (RIPEC), a venerable Rhode Island policy "voice and catalyst" founded in 1932, released a report analyzing the structure of the state's quasi-public Economic Development Corporation (EDC) and suggesting a reorganization. Governor Lincoln Chafee requested the report in May, following the scandalous collapse of 38 Studios, which had been the major basket in which the EDC had placed $75 million in bond-sale eggs.

Fortunately, Chafee Spokeswoman Christine Hunsinger confirms, for the Ocean State Current, that the state did not pay for the report. That's fortunate because — despite its 62 pages of text and 73 pages of organizational charts, definitions, and other appendices — the document does little to justify any particular new economic development structure and nothing to answer the more fundamental questions about the state's worst-in-the-nation employment situation.

Things We Read Today (16), Friday

August Employment Data for Rhode Island and the Nation

Justin Katz

Once again, the headline is that Rhode Island's unemployment rate fell another tenth of a percent, to 10.7%. And at least it's true, this month, that employment went up instead of down. (The past few drops in the unemployment rate were a result of people giving up their job searches, so they weren't counted in the statistics.)

But people continued to leave the state's labor force, and the employment increase wasn't exactly dramatic, giving the impression that our decline hasn't turned around, but has edged toward stagnation.

September 20, 2012

Things We Read Today (15), Thursday

Justin Katz

Issuing bonds to harm the housing market; disavowing movies in Pakistan and tearing down banners in Cranston; the Constitution as ours to protect; the quick failure of QE3; and Catholic social teaching as the bridge for the conservative-libertarian divide.

September 19, 2012

Things We Read Today (14), Wednesday

Justin Katz

Why freedom demands father-daughter dances; the U.S., less free; PolitiFact gets a Half Fair rating for its Doherty correction; and the mainstream media cashes in some of its few remaining credibility chips for the presidential incumbent.

September 7, 2012

I'll Ask Again: Better Off?

– Nonfarm payrolls increased by only 96,000 in August, the Labor Department said, versus expectations of 125,000 jobs or more. The manufacturing sector, much touted by the president in his convention speech, lost 15,000 jobs.

– Since the starts of the year, job growth has averaged 139,000 per month vs. an average monthly gain of 153,000 in 2011.

– As the chart at the top shows, the unemployment rate remains far above the rate predicted by Team Obama is Congress passed the stimulus. (This is the Romer-Bernstein chart.)

– While the unemployment rate dropped to 8.1% from 8.3% in July, it was due to a big drop in the labor force participation rate (the share of Americans with a job or looking for one). If fewer Americans hadn’t given up looking for work, the unemployment rate would have risen.

– Reuters notes that participation rate is now at its lowest level since September 1981.

– If the labor force participation rate was the same as when Obama took office in January 2009, the unemployment rate would be 11.2%.

– If the participation rate had just stayed the same as last month, the unemployment rate would be 8.4%.

– The Labor Department also said that 41,000 fewer jobs were created in June and July than previously reported. The change in total nonfarm payroll employment for June was revised from 64,000 to 45,000, and the change for July was revised from 163,000 to 141,000.

– The broader U-6 unemployment rate, which includes part-timer workers who want full-time work, is at 14.7%.

Government Surplus Wasn't the Problem; It's the How That Matters

Justin Katz

In his daily flurry of tweets, WPRI reporter Ted Nesi linked to an interesting article by Joe Weisenthal in Business Insider. Weisenthal's conclusion is that the government surpluses of President Bill Clinton's second term were, themselves, the cause of the late '00s' economic bust:

The bottom line is that the signature achievement of the Clinton years (the surplus) turns out to have been a deep negative. For this drag on GDP was being counterbalanced by low household savings, high household debt, and the real revving up of the Fannie and Freddie debt boom that had a major hand in fueling the boom that ultimately led to the downfall of the economy. ...

So while Clinton will be remembered nostalgically tonight, for both the performance of the economy and his government finances, they shouldn't be remembered fondly.

As if for authority, Weisenthal prints a PNG image of an economic formula (in a special formula font, even), but then he and his economist sources proceed to assert causation where there was only a temporary correlation in the parts of the equation during the Clinton era.

Things We Read Today, 3

September 3, 2012

Things We Read Today, 1

Justin Katz

One thing I've learned, in years of blogging, is to be wary of proclaiming new regular features. Yet, I've been finding myself at the end of each day with a browserful of tabs of content on which I'm inclined to comment.

So, as interest and time allow, I'll publish quick-hit posts containing commentary that is somewhere between a tweet and a full-on blog post.

Leaning Against the Privileged Place of Investments

Justin Katz

Readers shouldn't be surprised to hear that I'm largely in agreement with Peter Ferrara's "Obama's Accelerating Downward Spiral for America," but he happens to voice one bit of center-right common wisdom with which I have growing disagreement:

There is no secret or magic as to how to turn around these declining incomes. Increased investment in business expansion and start ups increases demand for labor, which drives up wages. That investment buys new tools and capital equipment for workers, making them more productive, which provides the cash flow to increase wages.

Increasing investment results from reducing the tax rates on investment, which enables investors to keep a higher percentage of what they produce, increasing incentives for investment.

My resistance to this suggestion — notwithstanding Ferrara's positioning of it as a statement of the obvious — has three sides.

September 2, 2012

At the risk of repeating myself, I have to opine that one of Rhode Island's core economic challenges is the frequency of sentences like this:

To position Rhode Island to compete successfully for jobs and investments, a new public/private economic-development partnership should be designed to implement an integrated economic-development strategy that focuses on business retention and expansion, cultivates new business startups, supports a culture of innovation and entrepreneurship, develops market-driven workforce solutions to help grow the middle class, creates a robust research capability to help make better investment and policy decisions, develops a comprehensive manufacturing strategy, aligns state capital programs with economic-development strategies, develops best-in-class business information and knowledge exchanges, provides the highest level of customer service, builds on its regional economic-development assets and actively manages Rhode Island’s image and reputation in the marketplace.

Admittedly, I've been known to write a Melvillian paragraph from time to time, but I always try (at least) to make my endless sentences go somewhere. At a minimum, there should be some humor in there, or a rest-stop of wordplay to persuade the reader that it's worthwhile traveling on — perhaps rereading with justified suspicion that something worth catching might have been missed. But that's 109 words, a full four inches of Saturday Providence Journal column space, of the sort of technocratic jargon that leaves working self-starters rightly convinced that the underlying message is: "You're not included."

August 31, 2012

All of Us Are the Job Generators

Justin Katz

Although with regret, I have to opine that former East Providence city councilman Robert Cusack misses the target in his op-ed, yesterday, suggesting a way for Rhode Island to rejuvenate its sputtering economy:

We need to identify a job generator, make the changes needed to attract those jobs and then promote Rhode Island to execute the strategy. Which job generator? The initiative that brought Fidelity to the state has worked. Financial services remains a good candidate. Now we hear of bio-science in a new “Knowledge District.” Other ideas have been put forward that capitalize on our strengths. Whichever one or two job generators we target, that decision for once should be data-driven and fully vetted, and not a hipshot. Our future as a state is at stake.

The frame of mind that presents a policy prescription of what "we" (ultimately having to mean the government) need to do is fundamentally built around a trap in logic. Government officials — elected, appointed, or bureaucratic — have no competence in predicting the future bends of the marketplace. Just as the stock market is ultimately a gamble, wagering the state's economic well-being on the probability that the companies that happen to be in Rhode Island will happen to compete well in an industry that happens to take off is a high-stakes bet at best.

August 29, 2012

The Risk of Investment Promises May Be Unhedgeable

Justin Katz

Early in the summer, Rhode Island General Treasurer Gina Raimondo announced that the state had invested $900 million of its pension assets in hedge funds. The decision was actually made in the middle of last year, in response to an asset liability study, treasury spokeswoman Joy Fox tells the Current. At that point, the treasurer began accumulating resources in cash to transition it into the new strategy.

August 23, 2012

Umm... Who (and What Policies) Got Us into This Mess?

Justin Katz

I've had the extreme good fortune to shift careers to one that allows me time to create and stare at charts. (Sadly, yes, that's a literal description of some of my afternoons, as well as my feelings about those afternoons.) So it's with an especially strong "What!?" that I watched this video, via Ann Althouse, via Glenn Reynolds:

To save time for those who don't want to watch a political ad, the important point is that former President Bill Clinton argues for a second term for President Obama on the grounds that Republicans want to return to an era of deregulation — which, he claims, is "what got us into trouble in the first place." This, he contrasts with the Obama's plan, which "only works if there's a strong middle class." "That's what happened when I was president."

Let me first say that deregulation did play a role in our current predicament, but it wasn't deregulation alone. It was deregulation with a de facto government backing when risky ventures went wrong.

August 18, 2012

What Happens In A Good Economy

Patrick Laverty

It's not that often where I can find an article on CNN.com that has much relevance to Rhode Island, but this one caught my eye. It just shows what a little ingenuity and work can do when you actually have a thriving economy.

Out in North Dakota where the unemployment rate currently sits at 3% due to a new oil boom, a high school student was able to identify a need. Due to the nature of the work and the places that people are living, showers can be hard to come by. Even to the point where people wait hours for a shower at a truck stop. This teen then hatched a plan to purchase an 18-wheeler trailer, retrofit it with shower rooms and an office, and purchase a separate water tank. He offers the service for a fee to the workers.

Sure, I get the point that North Dakota might have gotten lucky with the oil boom. That's like hitting the lottery. But at the same time, the state has been smart enough to simply get out of the way and let the business and entrepreneurs thrive. Business begets business. When you let the market thrive, other businesses will piggyback on top of it and when people perceive a need, they'll work to fill that need.

The other thing that struck me in the article was the kid's attitude with regard to work and money.

Jensen said that while his parents would always be there to assist if he really needed it, the burden of tuition rests squarely on him. He is determined to balance his passion for music with the reality of life.
"Music is what I absolutely love doing, but for anything in life, if it doesn't pay the bills you gotta find something that does," he said.

"you gotta find something that does." Wow. If you fail at something, keep working to find something else that you can be successful at. That is about as opposite from the "what's in it for me" and the "where's my handouts" attitude that seems so prevalent here in Rhode Island.

North Dakota is about 1800 miles from Rhode Island but judging by the differences in the states, North Dakota might as well be Mars.

August 17, 2012

Other States Need Much More Misery Before RI Has Company

Justin Katz

The unemployment rate for Rhode Island fell by one tenth of a percent to 10.8%, but total employment dropped by 80 people. That's not even a "mixed picture," though. The only reason the unemployment rate moved in a seemingly positive direction is that 471 more Rhode Islanders just gave up looking for work.

So if the unemployment rate is a positive sign, then the state's motto might as well be "We hope people leave faster than they lose their jobs."

About the best that can be said for the Ocean State is that every other state in the union lost more employment than it did, except Utah, which saw a slight gain. That context is illustrated very well in an update to my chart showing labor force (employed plus looking for work) and employment for Rhode Island, Massachusetts, and Connecticut as a percentage of each state's January 2007 labor force.

August 11, 2012

Barro's Welfare Error

Justin Katz

Via Ted Nesi comes a Bloomberg column by Josh Barro. It's one of those commentaries in which it isn't quite clear whether the author is offering pure political advice or expressing his opinion, so I'll assume the latter. In that context, here are Barro's thoughts on the balance of the economy and government:

If you concede that the purpose of a business is to provide well-paying jobs and solid benefits, then you cannot defend private equity. Private equity defenders must stand up for the idea that firms do not have a social obligation to retain and pay their employees; their function is to produce products and profits and getting them to do so more efficiently is good for consumers and for the economy as a whole.

… [Therefore, it's a] straightforward neoliberal proposition: The government should provide a robust safety net so that employers can be left free to hire, fire, open and close at will. A dynamic private sector is important, but it needs a substantial welfare state to support the people who fall through its cracks.

Barro's is an interesting argument, but its greatest asset is how clearly it brings into focus something that people across the country are beginning to sense, especially on the right: The model of big finance and big business operating to supply wealth, with a robust welfare state picking up the pieces shed in the name of efficiency, is an excellent example of the ways in which the money-shuffling sector is distorting the country's economy and government deleteriously in its own favor.

Barro introduces an error with his most fundamental premise that there is such a thing as one single "purpose of a business." The purpose of a business is whatever the people involved in it want it to be. If they value profit above all else, they'll follow Barro's reasoning; if they value a sense of community, they'll operate differently.

Indeed, the infinite variety of priorities is a large part of what makes people go into one industry or another — or one line of work or another.

August 6, 2012

Recoveries: The Difference the Debt Makes (Not to Mention the Government's Focus)

Justin Katz

Earlier today, Glenn Reynolds linked to an American Enterprise Institute post by James Pethokoukis, drawing on charts from economist John Taylor showing that the United States economy hasn't been returning toward where it would have been without the crash, and that this is unusual for prior downturns.

The reasons, I think, can be inferred from this chart, which I created with a view toward answering the question of whether it's reasonable to continue expecting 7-8% returns on pension fund investments:

August 1, 2012

Hopkins Center Milton Party (and Thoughts on the Fuel of Capitalism)

Justin Katz

The Stephen Hopkins Center for Civil Rights' panel discussion on the event of Milton Friedman's hundredth birthday offset "liberaltarian" Brown professor John Tomasi with June Speakman, a Roger Williams professor more inclined to agree with the prefix of the coinage. The panel would have benefited from the inclusion of an unabridged conservative who agreed with its root.

The most interesting idea placed on the Nick-a-Nees table was Tomasi's hypothesis that free markets can correspond with social justice if we think of the latter concept "in new ways." The people who developed social justice, he says, just "happened to be all from the left."

A conservative panelist might have suggested that there's no "happened to be" about it — that the very concept was designed to supplant the competing idea of charity and free association. Justice is the province of the police and the justice system, and "social justice" inherently suggests that those who hold the political levers can judge and impose their view of a just society on others against their will.

July 27, 2012

The Context of the President's Context

Justin Katz

It's intriguing to observe the telescoping nature of the "context" to which folks are referring when discussing President Obama's infamous Friday the 13th Roanoake speech. The damning two sentences continue to be:

If you’ve got a business -- you didn’t build that. Somebody else made that happen.

The inferred meaning is that somebody else should get credit for the business that you built. The president's defenders introduce the entire paragraph and the next, arguing that the context shows Obama's statement to have been that business owners didn't build the infrastructure on which their businesses rely:

If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business -- you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.

The point is, is that when we succeed, we succeed because of our individual initiative, but also because we do things together.

The critics expand the text in the opposite direction, to the paragraph before, arguing that the context is, if anything, worse than the gaffe, mainly because of the preachy, scornful tone:

There are a lot of wealthy, successful Americans who agree with me -- because they want to give something back. They know they didn’t -- look, if you’ve been successful, you didn’t get there on your own. You didn’t get there on your own. I’m always struck by people who think, well, it must be because I was just so smart. There are a lot of smart people out there. It must be because I worked harder than everybody else. Let me tell you something -- there are a whole bunch of hardworking people out there.

At this point, as I've argued (and continue to believe), the president's defenders are probably correct on the grammatical point of the key sentence, but his detractors have the better case on the context. In response, a liberal commenter on Anchor Rising criticized me for not including the whole speech. And happy, as ever, to comply, I took a closer look and did indeed come to a striking conclusion: Obama's context is even worse than I'd thought.

July 26, 2012

Talking Teen Unemployment and the Minimum Wage on the Dan Yorke Show

Justin Katz

630AM/99.7FM WPRO has posted my appearance on the Dan Yorke show, Tuesday, in two segments. The first is the initial half hour introducing the research from the RI Center for Freedom & Prosperity and touching on some conclusions. For the second hour, Economic Development Corp. board member and VIBCO President Karl Wadensten joined us in the studio for a broader discussion.

July 25, 2012

Mancession Recovery... Sexist!

Justin Katz

In a strong indication that, among journalistic practitioners, the biased media narrative is more a matter of intellectual laziness than cultural duplicity, the latest canned story, by Los Angeles Times reporter Don Lee, is that workplace discrimination is landing men the great majority of "newly created" jobs:

Since the recession ended in June 2009, men have landed 80% of the 2.6 million net jobs created, including 61% in the last year. ...

The gender gap has raised concerns about possible discrimination in hiring. If the trend persists, it could set back gains made by women in the workplace, experts said.

"It's hard to know [whether] some employers place a priority on men going back to work," said Joan Entmacher, vice president for Family Economic Security at the National Women's Law Center. Of particular concern, she said: Opportunities for women in higher-paying fields such as manufacturing are shrinking.

But back in February 2009, even the New York Times had to acknowledge the reality of the male-dominated recession, or "mancession":

The proportion of women who are working has changed very little since the recession started. But a full 82 percent of the job losses have befallen men, who are heavily represented in distressed industries like manufacturing and construction. Women tend to be employed in areas like education and health care, which are less sensitive to economic ups and downs, and in jobs that allow more time for child care and other domestic work.

Of course, Times reporter Catherine Rampell saw the silver lining as women's approaching men's percentage of the workforce. A conservative can't help but think of Margaret Thatcher's criticism of socialists, that they'd be happier to have everybody equally poor than wealthy over wide spectrum.

July 23, 2012

Generations Adrift Without the Habits of Working

Justin Katz

One hears anecdotes, from time to time, about young adults who simply do not understand the habits associated with holding a job. Punctuality, an understanding that sometimes tedious or undesirable activities are necessary, and an appreciation of the relationship between consumer and vendor are all examples. Giving young adults the opportunity to learn such principles first-hand is almost as critical as giving them experience with the occupational value of money.

A new paper that I've penned for the RI Center for Freedom & Prosperity takes a look at teenage unemployment, with a particular eye on the minimum wage. The upshot is a collapse of employment among the young, especially in locations, like Rhode Island, that can least afford to lose the enterprising inclination in a generation of its residents.

July 20, 2012

Mass Residents Now Visit and Spend More at RI Slot Parlors Than Rhode Islanders

Mass. residents spent close to $1 billion last year at New England casinos, continuing in a trend of increased spending over the past several years that beat out every other state in the area.

This year was the first time that the Bay State outspent its neighbors, totaling a cool $909 million on gaming and non-gaming amenities at Connecticut's destination resort casinos and at the slot parlors in Rhode Island and Maine.

Massachusetts residents also, for the first time, out-visited and out-spent Rhode Islanders at Rhode Island's two slot parlors --- Twin River and Newport Grand --- by making 2 million visits to those facilities, and spending an estimated $284 million, which is a 7% increase over 2010 spending levels. Mass. generated more than $157.6 million in tax revenues for the Rhode Island state government.

Some immediate reactions:

> As reflected in disposable income, is this yet another indication of the inadequacy of the Rhode Island economy; in this case - a fair comparison - as measured against a neighbor's economy? A related question: is this yet another indication that Massachusetts is pulling out of the recession faster than Rhode Island?

> What are the implications to Rhode Island's slot parlor revenue stream when the Mass casinos come on line? Perhaps a more accurate question would be: how much further will that revenue stream be stunted now that Mass residents outnumber Rhode Islanders at our slot parlors?

July 19, 2012

Credit for Building, Blame for Dividing

Justin Katz

President Obama's teleprompter style has been the subject of substantial (often mocking) critical commentary, and with some justification, as this nearly parodic 2010 video from a Virginia classroom proves:

Given recent political events, one can sympathize with the desire of public officials to avoid extemporaneous speech. In a world in which one's every public utterance can be recorded, scrutinized, and exploited, one can't rely on an audience's capacity to get your drift and give you the benefit of the doubt. And it's all to easy to blurt out a sentence such as the now infamous, "If you've got a business, you didn't build that."

Predictably, in the realm of commentary, the debate has moved to the meta matter of whether commentators are deliberately misconstruing the President's meaning. On Slate, Dave Weigel charitably infers "a missing sentence or clause" that Obama neglected to utter because he was "rambling." On Reason, Tim Cavanaugh rejoins that "at some point it helps to look at that thing above the subtext, which is generally known as 'the text.'"

July 18, 2012

Nationwide Unfunded Pension Liability Now up to $4.6 Trillion

Justin Katz

About a month ago, I presented a comparison of estimates for the nation's public-sector pension problem. While none of the results were encouraging, there was huge variation in the degree of frightfulness — the difference mainly being in the way in which they calculate liabilities.

One of the economists, Andrew Biggs, of the American Enterprise Institute, has updated his findings for State Budget Solutions, bringing the highest unfunded liability estimate currently on the table to $4.6 trillion.

July 17, 2012

A Decade of Moving Next Door

Justin Katz

I've been following taxpayer migration data for years, but in a haphazard way. A new study that I've coauthored for the RI Center for Freedom & Prosperity finally gave me the opportunity to review all fifteen years of available data from the IRS.

The picture — from the 2003 beginning of what can only be described as an exodus — is frightening. After accounting for the tens of thousands of Rhode Islanders who moved to other states and other taxpayers who moved in the opposite direction, Rhode Island lost 24,455 households, with $1.2 billion of annual income (not inflation adjusted). More conspicuously, a net 3,406 taxpayers moved right across the border, to abutting counties in Massachusetts and Connecticut, taking with them $254.5 million in annual adjusted gross income (AGI).

July 12, 2012

RI's Paradox of Being Great, but Still Failing

Justin Katz

Remember when the local PolitiFact took the Ocean State Policy Research Institute (OSPRI) to task for claiming that the estate tax was driving Rhode Islanders out, especially down to America's retirement peninsula? One statement from that article has stuck with me, over the year and a half since:

One expert was Kail Padquitt, staff economist for The Tax Foundation, a think tank that studies federal and state tax policies, who said he hasn’t seen any proof that the prospect of paying estate taxes drives people to move.

"You can see people are leaving a state, but (determining) why they are leaving is hard," Padquitt said. "Florida has sunshine, low taxes and warmth. Why wouldn’t people move there?"

That rhetorical question has come to mind recently for a couple of reasons. For one thing, I've been working on a related bit of research for OSPRI's successor organization, the RI Center for Freedom & Prosperity, to be released next week.

Today, though, the quotation came to me in relation to another, separate but related, context. As most folks who follow RI closely have already heard by now, CNBC placed the state dead last (again) on its business friendliness ranking, and very poorly in other areas. Marc Comtois's Anchor Rising post on the subject includes a reaction to RI Future's Bob Plain.

July 7, 2012

Yesterday we learned that the economy created 80,000 jobs and was at 8.2%, which President Obama called "a step in the right direction". Back in 2004, coming out of a recession, the economy created 310,000 new jobs and unemployment was at 5.6%. But that wasn't good enough--wasn't the real story--for a little-known state legislator running for the U.S. Senate. Instead, then-State Senator Barack Obama criticized then-President George W. Bush and his administration for travelling around celebrating the economic progress indicated by the 310,000 new jobs and 5.6% unemployment rate (h/t).

So remember:

310,000 new jobs and 5.6% unemployment = "too early to celebrate"
80,000 new jobs and 8.2% unemployment = "step in the right direction"

July 5, 2012

The Conundrum of Consumer Bags

So, the town of Barrington is well on its way to banning the use of plastic shopping bags among the commercial establishments within its borders:

... the town conservation commission has already voted to ban the use of plastic grocery bags at retail stores. The proposal now goes before the Town Council for review.

If it passes, Barrington would become the second town in New England to impose such a law, increas ingly popular along the trendy West Coast. San Francisco banned plastic bags in large grocery stores and pharmacies in 2007, followed by Oakland and Los Angeles.

The move is triply surreal. For one thing, as American Progressive Bag Alliance spokeswoman argues, "Paper bags are worse for the earth." That is, the ban would be a government restraint on human activity that is at best debatable.

June 18, 2012

Reducing Government Growth isn't Austerity

Marc Comtois

One meme that some are attempting to make take hold (including the President; "the public sector isn't fine") is that the high unemployment we're seeing is in large part because of the loss of public-sector jobs and especially at the local level:

See that little dip in public sector employment? That right there's you're problem. But, given the 50 year(ish) growth trend, that little dip doesn't seem like much. You see, the greatest portion of governmental growth has historically been at the local level, as this graph from Menzie Chin at the Econbrowser blog shows:

Hm. How to make the argument, then? Ya gotta shape the data! This is how a comparison of private sector to public sector unemployment looks when both are compared to their own relative peak employment (instead of raw numbers), as done by Yale's Ben Polak and Peter K. Schott.

Mon dieu! Look at that, the public sector is going down while the private sector is recovering, just like President Obama said. Yet, as Mickey Kaus explains, the loss of many of these local government jobs can be attributed to the disappearance of federal subsidies:

In this recession, Democrats voted a temporary subsidy for state and local governments to keep up their hiring–and when it expired, those governments found they couldn’t afford to keep on as many employees–especially given the unsustainable pensions and benefits Democrats and others had granted oft-unionized public workers in good times (and that the Dem stimulus subsidized).

May 21, 2012

"A Fast Infusion Of Jobs"

Patrick Laverty

One thing has stuck out to me recently in a couple articles I've read. One article is a couple years old and the other appeared just this past weekend and I think they both make logical mistakes. They both talk about getting Rhode Islanders back to work, yet both are also in fields that I wonder how many new hires are being plucked from the unemployment lines and how many are being taken either from other companies or moved from one project to another.

During the past week, in trying to figure out all this 38 Studios stuff, Ted Nesi sent me an article he wrote in 2010 when the deal was first being done. One part that stuck out to me was this:

Robert Stolzman, a lawyer for the EDC, said last week. "We wanted a fast infusion of jobs in Rhode Island." The number of unemployed Rhode Islanders was 67,500 in August and the jobless rate was 11.8 percent, the R.I. Department of Labor and Training said Friday.

However, these aren't the type that someone routinely can pick up after filling out a simple application:

Each of those jobs must pay at least $67,500 a year plus benefits under state law.

That's no small salary here in RI, even for a game developer. I have to believe that in order to really qualify for that kind of salary, we're dealing with some fairly well-qualified individuals. One thing that I'd like to see in 38 Studios' hiring data (but I'm 99.9% certain will never see the light of day) is how many of their hires were plucked from the Rhode Island unemployment lines. Isn't Mr. Stolzman at least implying the point of the EDC's deal with 38 Studios is to hire unemployed Rhode Islanders? When you have tens of thousands of people out of work, hiring up to about 300 people isn't going to put much of a dent in the unemployment numbers, but if you aren't pulling people off the unemployment lines, it sure isn't going to help those numbers either. How many of the new hires were pulled away from other local companies or even people who relocated from other parts of the country? Wouldn't that be good information to have to see that the intent of this deal with the state was being followed?

In addition, the House Republican budget calls for deep cuts in highway funding, reducing transportation spending by at least 25 percent over 10 years. It slashes much-needed infrastructure investments that would put thousands of Rhode Islanders back to work.

I have no doubt that there are unemployed construction workers. Some of my neighbors are in the construction industry, I hear their stories all the time. However, if there was more funding given to highway projects, what are the odds that it would be given to the unemployed? Or would it be given to one of the usual, big-name construction companies that we always see by the side of the road? Would they be taking people off the unemployment line too or would they simply finish one job and move their people on to the next job? Just like when PolitiFact gave Sheldon Whitehouse a "False" rating for fudging his numbers when it came to putting people back to work, I see much of Cicilline's rhetoric in the same way. If we started handing out highway contracts, how many people would it pull off the unemployment lines and not just how many people would be employed. In spite of Senator Whitehouse's math, one guy working a job this week and working a job next week is still just one job.

To me, getting people back to work is and should be the number one issue going forward. When people are working, lots of other problems seem to disappear (a pessimist might say it merely hides the structural issues). Getting people off the actual employment lines should be the top priority for everyone running for and already in office.

May 15, 2012

You Can't Have It Both Ways

Patrick Laverty

For those who are seemingly dancing on the grave of 38 Studios already, keep in mind the reasons for things like the EDC's $75M loan guaranty. I'm hearing and seeing various people crowing with their "I told you so" and explaining that the state should not be in the business of picking winners and losers. They're questioning why conservatives like Carcieri and Schilling would be in favor of government intervention only when it suits them.

That's all fine, and I'm in agreement that the government should not be making such risky investments and putting taxpayer money on the line. But why do they have to? Why do many businesses need to negotiate some kind of deal with the Governor and/or General Assembly to find Rhode Island more appealing or even fiscally possible? With the many different regulations and taxes (boiler inspections and inventory tax just being a couple examples) why would a business want to come to Rhode Island? Well, the answer is, they don't. Unless someone reaches out to them and makes an offer for things like property tax breaks (GTech), film credits (Body of Proof) or the current 38 Studios loan guarantee in exchange for 450 jobs.

I've said this before, but let's try it again. Rather than one-off, quick fix gimmicks, how about we just overhaul the system. Create a set of business regulations that we can be proud of and advertise and that will be enough to entice businesses to move here.

If we want to have jobs in Rhode Island, we need to have businesses in RI. As others have said, we need to start looking at businesses as job creators and not piggy banks for new taxation. Let's generate it through the income tax of thousands of new employees at these businesses and the increased value of real estate.

The problem unfortunately is I expect most will only see half of this issue and merely conclude, "See, I told you it was bad to give money to a business." without looking at any of the reasons for why it was necessary to do so in the first place.

March 26, 2012

The Rhode Island Economy and Change

If the state did not develop new industries and revive old ones, future generations would have trouble making it in the Ocean State.

and

A heavy reliance on a single industry made the state “highly vulnerable to shifts in consumer demand and technological progress,” said economists at Brown University.

but wait, there's more:

[The state] suffered from a weak economy, a high unemployment rate, high unemployment compensation costs and an unstable job market made up of mostly low-skill and low-paying jobs

and yet more:

Generating jobs should be the state’s top priority, they said. The governor should rely on a group of economic advisers and make Rhode Island more attractive to industry through new laws. And business, labor and government officials should embrace a common goal.

Is any of this sounding familiar yet? Any of this sound like Rhode Island pundits of the last 5-10 years? Well, those quotes are as much as 65 years old. The first one, about not developing new industries, was uttered in 1947. The second was issued in the 1950s and the last one in 1972.

It appears that many of the leaders, while some were not even born yet when these statements were made, have not really learned from the past. What probably makes this even worse is it appears there was once a chance to re-make the Rhode Island economy, but it too was shot down:

In 1983, Gov. Joseph Garrahy led a campaign for the plan’s approval — a blueprint to create 60,000 jobs, improve wages and nurture high-tech industries such as robotics and medical devices. ... Voters, angry at politicians and wary of tax hikes, overwhelmingly rejected the plan.

Yet again today, when people are trying to create a new economy, such as in the Jewelry District (I just can't bring myself to call it the Knowledge District) it too is mocked as a bad idea.

It sure seems that in Rhode Island the old axiom, "Those who do not learn from history are doomed to repeat it" has never been more true.

January 24, 2012

The Cultural Divide Explains the Economic One

People are starting to notice the great divide. The tea party sees the aloofness in a political elite that thinks it knows best and orders the rest of America to fall in line. The Occupy movement sees it in an economic elite that lives in mansions and flies on private jets. Each is right about an aspect of the problem, but that problem is more pervasive than either political or economic inequality. What we now face is a problem of cultural inequality.

When Americans used to brag about "the American way of life"—a phrase still in common use in 1960—they were talking about a civic culture that swept an extremely large proportion of Americans of all classes into its embrace. It was a culture encompassing shared experiences of daily life and shared assumptions about central American values involving marriage, honesty, hard work and religiosity.

Over the past 50 years, that common civic culture has unraveled. We have developed a new upper class with advanced educations, often obtained at elite schools, sharing tastes and preferences that set them apart from mainstream America. At the same time, we have developed a new lower class, characterized not by poverty but by withdrawal from America's core cultural institutions.

The piece goes into great detail about how we got here, but sets that aside as so much water under the bridge now. Instead, the focus is on a prescription for shrinking the gap. It's not a massive, structured plan. Instead, it centers on changing attitudes.

There remains a core of civic virtue and involvement in working-class America that could make headway against its problems if the people who are trying to do the right things get the reinforcement they need—not in the form of government assistance, but in validation of the values and standards they continue to uphold. The best thing that the new upper class can do to provide that reinforcement is to drop its condescending "nonjudgmentalism." Married, educated people who work hard and conscientiously raise their kids shouldn't hesitate to voice their disapproval of those who defy these norms. When it comes to marriage and the work ethic, the new upper class must start preaching what it practices....America outside the enclaves of the new upper class is still a wonderful place, filled with smart, interesting, entertaining people. If you're not part of that America, you've stripped yourself of much of what makes being American special.

Such priorities can be expressed in any number of familiar decisions: the neighborhood where you buy your next home, the next school that you choose for your children, what you tell them about the value and virtues of physical labor and military service, whether you become an active member of a religious congregation (and what kind you choose) and whether you become involved in the life of your community at a more meaningful level than charity events.

Everyone in the new upper class has the monetary resources to make a wide variety of decisions that determine whether they engage themselves and their children in the rest of America or whether they isolate themselves from it. The only question is which they prefer to do.

Conservatives naturally focus on equal opportunity rather than on equal outcomes. But equality of opportunity is a more radical concept than we generally concede. It is not a natural state; it is a social and political achievement. It depends on healthy families and cohesive communities. But opportunity also depends on effective government — on public safety, public education and public health. Governmental overreach can undermine other important social institutions. Yet the retreat of government does not automatically restore them to health.

Liberals often fail to recognize that income redistribution, while preventing penury, is not identical to social equality. The main challenge of poverty is not a lack of consumption but a lack of social capital — measured in skills and values — and of opportunity. Addressing these problems is more complex than increasing marginal tax rates, particularly when revenue is used to cover the increasing costs of non-means-tested entitlement programs. The structure of the modern welfare state is not focused on empowering the poor. Instead, it has increased the percentage of government transfer payments that go to middle- and upper-income seniors.

On all sides, the poverty debate can be paralyzed by an obsession with fundamental causes. A failing community is a puzzle box of interconnected failures. Globalization and technology put downward pressure on wages and lead to stagnant labor markets. Permissive cultural norms encourage family breakdown and self-destructive behavior. Complaining about the rise of China or the decline of morality can be satisfying. But cosmic explanations can be obstacles to action.

Read all of it. For a more local view (both in problems and potential ideas, read this post (and the discussion) by "Frymaster" over at the resuscitated RI Future.

January 5, 2012

Krugman: Don't Worry About Debt; It's Like a Ponzi Scheme

Justin Katz

In a column titled "Nobody Understands Debt," Paul Krugman gives two reasons for Americans not to worry about President Obama and the rest of the federal government running up bewildering amounts of debt.

First, families have to pay back their debt. Governments don’t  all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Is it me, or does that sound like another Social Securityesque Ponzi scheme? Like Social Security, it's subject to the same assumption that the society will continue to expand both economically and with respect to population, which are arguably very closely related. The peculiar liberal death wish comes into play because liberal policy preferences, many of the very policies that have required so much government spending, contribute to stagnation in population growth. At some point, the equation doesn't add up.

Which leads to Krugman's second point:

Second  and this is the point almost nobody seems to get  an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.

This is true, he argues, even when we don't owe the money to ourselves, but to somebody else:

It's true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents' worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors. If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. Nor are we heading rapidly in that direction.

Unfortunately, he's not very clear about whom he's defining as "America." Following the links that Krugman provides to other things he's written, one comes across a chart showing the nation's foreign liabilities as 160% of GDP, versus assets of 140%. But even the "deficit-worriers," as Krugman calls them, put the total debt, to foreign and domestic lenders, at $15.2 trillion, versus GDP of $14.5 trillion. That's a ratio of about 105%. Yet, the U.S. Debt Clock gives $56.4 trillion, or 389% of GDP, as the debt of every person and entity in the United States.

So, what Krugman means, therefore, by America's debt, I'm not sure, although it looks likely that he's stating that the $56.4 trillion grand total includes $23.2 trillion in foreign debt and $33.2 trillion in domestic debt. Whatever the case, I'd wager that whomever Krugman shuffles into the deck for the additional amount of foreign debt shown in his chart has very high foreign investments.

The worry on the table, though, is the federal government's debt, and if the economy and population continue to remain so low, it's not going to fade into a field of rapid growth, but is going to become a problem that even Krugman-like apologists cannot deny. After all, the government's income is only the fraction of GDP that it takes in through taxes and fees. If one is going to compare the total debt of the people of the United States to GDP for the purposes of balancing it against foreign assets, it would be more reasonable to compare the government's debt to the $2.3 trillion it brings in through taxes. That's a ratio of 661%.

December 31, 2011

A Different Kind of Clock, Heading Toward a Different Kind of Midnight

Justin Katz

I'm cleaning out my bookmarks for the first time in about seven years, and as we approach the change of the clock from one year to the next, I thought it appropriate to direct your attention to the U.S. Debt Clock.

At this moment, the national debt is $15.2 trillion, personal debt is $16.0 trillion, and the total U.S. debt  including household, business, state and local governments, financial institutions, and the federal government  stands at $56.4 trillion.

December 8, 2011

Should Anyone Be Surprised that Government Bonds Might Not Be a Good Investment for the Next Few Years

Carroll Andrew Morse

Burton Malkiel, famous for having written a book titled A Random Walk Down Wall Street where he argues there's no systematic way to beat the market, offered this big-picture advice for balancing an investment portfolio in yesterday's Wall Street Journal...

Are we in an era now when many bondholders are likely to experience very unsatisfactory investment results? I think the answer is "yes" for many types of bonds—and that this will remain true for some time to come....So what are investors—especially retirees who seek steady income—to do? I think there are two reasonable strategies that investors should consider. The first is to look for bonds with moderate credit risk where the spreads over U.S. Treasury yields are generous. The second is to consider substituting a portfolio of dividend-paying blue chip stocks for a high-quality bond portfolio.

Malkiel explains his point with some interesting back-of-the-envelope macroeconomics.

But at least with regard to his second option, the blue-chip stocks, isn't he explaining something that's readily obvious from the state of our political system, i.e. right now, so many units of government have been run so badly, it is going to be a while before they can raise the money to take care of their governing obligations and pay high-interest bond yields, meaning that (to borrow a juxtaposition from Justin) investing money in actual productive activities right now is a much better option than investing in the government's ability to tax?

November 29, 2011

Whoops! Providence Budget Still Under Water

Patrick Laverty

Well, I don't like to say "I told you so" but an article in GoLocalProv yesterday about the state of Providence's budget wasn't really a surprise. According to the article, almost halfway through the current budget year, the budget still is not only not balanced, but it's about $24 million in the red.

Some of the reasons:

Savings of up to $6 million hinged on 30 officers taking advantage of an early retirement incentive. Only 16 did.

We asked about this one back in June when the agreement was made to avoid the layoffs. What if the department can't find 30 officers to retire? What then? Will there be layoffs now? Should there have been a clause in the agreement that if the 30 retirements weren't met that there'd be automatic layoffs to meet the expected numbers? Was this even considered?

Taveras hoped to save $11 million by switching retirees over to Medicare. But most of those savings got wiped out when the federal government slapped the city with an $8 million penalty

Wait, what? You figure out that you can switch your retirees over to the federal Medicare plan for the cost savings and you missed that part about the penalty? I'm sorry, but if I cost my boss $8 million, I'm not sure I'd still have a job. Plus, there's this:

Worse yet, it is not a one-time fee. Instead, the penalty will be assessed annually for the foreseeable future.

I guess the only silver lining in this is the city won't expect an $11 million savings each year, now they know to only expect a $3 million savings.

Lastly, am I the only one who remembers then-Mayor, then-Congressional candidate David Cicilline telling us that he was leaving Providence in excellent financial shape? Hmm, well there's also this:

The city ended the 2011 fiscal year in June with a higher-than-expected $4.9 million deficit, city records show—and that is not counting approximately $30 million that was borrowed to help close the gap.

$30 million to close a gap in a city that is in excellent financial shape?

I do wonder if Mayor Taveras referred to the situation he inherited as a "Category 5" hurricane, only because we don't have a Category 6.

Negative Outlook, but Still Able to Confiscate

Justin Katz

Like a lot of conservatives, I'm sure, I find the prospect of our nation's credit begin downgraded, or at least given a negative outlook, as Fitch Ratings just applied to the United States, a somewhat hopeful sign that the game of government taxing, borrowing, and spending cannot go on in perpetuity. But as I watch the dance, my sense that the agencies are really grading the government's ability to confiscate resources through taxation only grows stronger.

We'd like to think that the ratings reflect how well a government is doing its job of being a government and how strong its underlying economy is, and those are surely factors. But the core criterion for grading the debt that a government sells is the likelihood that it will be able to take money from the people under its control and hand it over to its lenders. Sadly, the U.S. government sits atop a large nation of people who desire to forge a (taxable) living and who thus far have proven unable to elect a government that's willing to restrain itself.

In that context, a "negative outlook" is little more than a whisper of a hint that the government needs to change its ways. For it to bear the fruit of a lower rating, the prospects would have to be bleak for the government paying back its debt at all. The imagination reels at what a world in which that's a real possibility would look like; it's one thing for Greece to appear unable to pay its bills, but the U.S.? Yet, experience shows that reasonable adjustments will not be made when entrenched interests have so much motivation to fight against them. Only crisis will serve, and few wish to foster crisis when it remains possible to pretend there's no long-term threat.

Part of the problem, it seems to me, is that there's no up from AAA. Selling less debt would make it more likely that the government can and will pay back what it already owes, but with the might of the U.S. bureaucracy as a collection agency, such a shift would be a mere shading of likelihood.

November 15, 2011

Rhode Island Will Recover, After Everyone Else Does

Carroll Andrew Morse

A projection posted at the New York Times Economix blog divides the 50 states and the District of Columbia into 5 groups, based on when they are expected to be home to the same number of jobs that they were in December 2007.

The first group has already recovered. The group after that is projected to recover by 2013. The last group isn't expected to recover until "past 2017".

There are only 3 states in the last group: Nevada, Michigan, and...I'll let you guess the third.

(Also, would anyone like to interpret the significance of the fact that one of the three places that has already made its recovery is D.C.?)

October 25, 2011

Eating on Only $4.50 a Day

Anti-poverty activists have thrown down the gauntlet to those of us lucky enough to eat regularly and (as obesity statistics show) too much.

Anti-poverty activists are challenging Rhode Island residents to spend just $4.50 a day on food for a week as part of a campaign to draw attention to the importance of funding for food stamp programs.

The Rhode Island Interfaith Coalition to Fight Poverty With Faith is conducting a "Food Stamp Challenge" beginning Thursday in which participants will be asked to spend on food the national average received by food stamp recipients. That translates into $31.50 over a week, or $1.50 a meal.

Here are a couple sample shopping lists for those up to the challenge. You can't buy everything from these lists, but you can get a pretty good (and healthy) week's worth of meals out of it. And if you're smart, you'll have some left over to go into stocking the pantry. The first list is comprised of items found in the weekly flier of a "big chain store".

Remember, these are just from the fliers. Who knows what deals you'll find when you actually walk the aisles. I even stayed away from the Top Ramen and frozen burritos! There are plenty of affordable and healthy options if you're willing to take a little time, stay out of the snack aisle, buy what's on sale (even stock up!) and "resign" yourself to buying cheaper store brand items. An enterprising shopper might even "cherry pick" the best from each store and save more. If you do that, you may be able to even splurge for a steak every now and then by, for example, dipping into your pasta reserves (each box of pasta has, what, 4 servings?).

My point isn't to denigrate those who rely upon food stamps to eat (which, as Justin already pointed out, are supposed to be supplemental anyway). It's to show that it's doable. And guess what? These lists are pretty darn close to what my family of four shops for regularly (incidentally, the food supplement would be $126 for all of us). My conclusion? The current level of food stamp subsidization is plenty sufficient.

October 24, 2011

The Catholic Notion of a Global Authority

Justin Katz

It comes around once a year in the missal for the Catholic Mass, and the lector, standing before his or her neighbors to read the holy words very often exudes a palpable discomfort:

Be subordinate to one another out of reverence for Christ.
Wives should be subordinate to their husbands as to the Lord.
For the husband is head of his wife just as Christ is head of the church, he himself the savior of the body.
As the church is subordinate to Christ, so wives should be subordinate to their husbands in everything.
Husbands, love your wives, even as Christ loved the church and handed himself over for her to sanctify her, cleansing her by the bath of water with the word, that he might present to himself the church in splendor, without spot or wrinkle or any such thing, that she might be holy and without blemish.
So [also] husbands should love their wives as their own bodies. He who loves his wife loves himself.

It's the second line in this passage from St. Paul's letter to the Ephesians that sticks in modern throats. Subordinate? I think not. What's missed is the balance between the calls to each spouse. The subordination requested is to a man who would do as Christ did and die a horrible death for those He loves. The dutiful husband and father is to be a savior to his family after the model of a crucified Christ. It's subordination to a man who is called to be subordinate right back. She realizes that she is part of him, and he realizes that she is him.

The Vatican called on Monday for the establishment of a "global public authority" and a "central world bank" to rule over financial institutions that have become outdated and often ineffective in dealing fairly with crises. The document from the Vatican's Justice and Peace department should please the "Occupy Wall Street" demonstrators and similar movements around the world who have protested against the economic downturn. "Towards Reforming the International Financial and Monetary Systems in the Context of a Global Public Authority," was at times very specific, calling, for example, for taxation measures on financial transactions. ... It condemned what it called "the idolatry of the market" as well as a "neo-liberal thinking" that it said looked exclusively at technical solutions to economic problems. "In fact, the crisis has revealed behaviours like selfishness, collective greed and hoarding of goods on a great scale," it said, adding that world economics needed an "ethic of solidarity" among rich and poor nations. ... It called for the establishment of "a supranational authority" with worldwide scope and "universal jurisdiction" to guide economic policies and decisions.

The Vatican didn't "call for the establishment" of such an authority in the sense that the world's leaders ought to get to work on it tomorrow. Rather, the document describes a long evolution toward an ideal. And as with St. Paul's characterization of marriage, the document isn't as one-sidedly anti-free-market as Philip Pullella's Reuters summary, above, suggests. It also acknowledges the risks of socialism and technocracy. Consider:

However, to interpret the current new social question lucidly, we must avoid the error  itself a product of neo-liberal thinking  that would consider all the problems that need tackling to be exclusively of a technical nature. In such a guise, they evade the needed discernment and ethical evaluation. In this context Benedict XVI's encyclical warns about the dangers of the technocracy ideology: that is, of making technology absolute, which "tends to prevent people from recognizing anything that cannot be explained in terms of matter alone" and minimizing the value of the choices made by the concrete human individual who works in the economic-financial system by reducing them to mere technical variables. Being closed to a "beyond" in the sense of something more than technology, not only makes it impossible to find adequate solutions to the problems, but it impoverishes the principal victims of the crisis more and more from the material standpoint.

In the context of the complexity of the phenomena, the importance of the ethical and cultural factors cannot be overlooked or underestimated. In fact, the crisis has revealed behaviours like selfishness, collective greed and the hoarding of goods on a great scale. No one can be content with seeing man live like "a wolf to his fellow man", according to the concept expounded by Hobbes. No one can in conscience accept the development of some countries to the detriment of others. If no solutions are found to the various forms of injustice, the negative effects that will follow on the social, political and economic level will be destined to create a climate of growing hostility and even violence, and ultimately undermine the very foundations of democratic institutions, even the ones considered most solid.

Recognizing the primacy of being over having and of ethics over the economy, the world's peoples ought to adopt an ethic of solidarity as the animating core of their action. This implies abandoning all forms of petty selfishness and embracing the logic of the global common good which transcends merely contingent, particular interests. In a word, they ought to have a keen sense of belonging to the human family which means sharing the common dignity of all human beings: "Even prior to the logic of a fair exchange of goods and the forms of justice appropriate to it, there exists something which is due to man because he is man, by reason of his lofty dignity."

In 1991, after the failure of Marxist communism, Blessed John Paul II had already warned of the risk of an "idolatry of the market, an idolatry which ignores the existence of goods which by their nature are not and cannot be mere commodities." Today his warning needs to be heeded without delay and a road must be taken that is in greater harmony with the dignity and transcendent vocation of the person and the human family.

I will certainly not be the last to acknowledge that religious people are just as prone as anybody to muddled economic thinking, and those who hew their careers and behavior most closely to the premise that a higher authority has a claim on their lives are no less prone to err in their trust of human authority than those who believe human beings can control everything. But what this particular document is describing is a human development that brings the people of the world together toward common advancement with full respect of individual autonomy.

That objective is, or ought to be, not only consistent with, but inherent to any ethical approach to economic liberty. The libertarian ideal, in other words, shouldn't be "let me do whatever I want," but rather, "let me do good in the way that I think best." And the global authority here described is one that conveys feedback in a deeper manner than achieved by price systems. Otherwise, the Vatican is warning, a prosperous peace cannot continue.

To lash out at suggestions of global cooperation is to miss the opportunity presented by such statements as this, from the Vatican's document (emphasis added):

... It is a matter of an Authority with a global reach that cannot be imposed by force, coercion or violence, but should be the outcome of a free and shared agreement and a reflection of the permanent and historic needs of the world common good. It ought to arise from a process of progressive maturation of consciences and freedoms as well as the awareness of growing responsibilities. Consequently, reciprocal trust, autonomy and participation cannot be overlooked as if they were superfluous elements. ...

As we read in Caritas in Veritate, "The governance of globalization must be marked by subsidiarity, articulated into several layers and involving different levels that can work together." Only in this way can the danger of a central Authority's bureaucratic isolation be avoided, which would otherwise risk being delegitimized by an excessive distance from the realities on which it is based and easily fall prey to paternalistic, technocratic or hegemonic temptations. ...

These measures ought to be conceived of as some of the first steps in view of a public Authority with universal jurisdiction; as a first stage in a longer effort by the global community to steer its institutions towards achieving the common good. Other stages will have to follow in which the dynamics familiar to us may become more marked, but they may also be accompanied by changes which would be useless to try to predict today.

Clearly, this is not a Cato Institute policy paper, but at the same time, it allows the room to suggest that the "changes" that we cannot predict include the development of social institutions outside of government  institutions of mutual consent and understanding, but consistent with free will and personal autonomy  that provide the necessary authority for consensual cooperation.

The error in the typical reaction to this sort of application of Catholic theology to the material world is to imagine that the Church has seen the future and it is the EU and UN writ large. Beneath the jargon of social justice writing is actually a call to re-imagine what global authority might look like, and it is a project that free-marketers ought to undertake with as much zeal as those who can think of nothing more original than the repackaged Marxism, which this very document describes as a failure.

ADDENDUM: I put this is all under our "On a lighter note...." category because there is humor in the unknowns surrounding the Occupy movement. Still, there are serious questions that haven't been answered.

Now, a movement that started with no concrete goals as a simple protest of power must decide what to do with some power of its own. Can a leaderless group that relies on consensus find a way for so many people to agree on what comes next? Can it offer not only objections but also solutions? Can a radical protest evolve into a mainstream movement for change?

Unfortunately, from what I have heard of the solutions, they roughly approximate the tongue-in-cheek poster above. In writing about the recent passing of Steve Jobs, Kevin Williamson illustrated that there is a dichotomy:

The beauty of capitalism — the beauty of the iPhone world as opposed to the world of politics — is that...[w]hatever drove Jobs, it drove him to create superior products, better stuff at better prices. Profits are not deductions from the sum of the public good, but the real measure of the social value a firm creates. Those who talk about the horror of putting profits over people make no sense at all. The phrase is without intellectual content. Perhaps you do not think that Apple, or Goldman Sachs, or a professional sports enterprise, or an Internet pornographer actually creates much social value; but markets are very democratic — everybody gets to decide for himself what he values. That is not the final answer to every question, because economic answers can satisfy only economic questions. But the range of questions requiring economic answers is very broad.

I was down at the Occupy Wall Street protest today, and never has the divide between the iPhone world and the politics world been so clear: I saw a bunch of people very well-served by their computers and telephones (very often Apple products) but undeniably shortchanged by our government-run cartel education system. And the tragedy for them — and for us — is that they will spend their energy trying to expand the sphere of the ineffective, hidebound, rent-seeking, unproductive political world, giving the Barney Franks and Tom DeLays an even stronger whip hand over the Steve Jobses and Henry Fords. And they — and we — will be poorer for it.

And to the kids camped out down on Wall Street: Look at the phone in your hand. Look at the rat-infested subway. Visit the Apple Store on Fifth Avenue, then visit a housing project in the South Bronx. Which world do you want to live in?

September 21, 2011

Netflix Shows Flaws in Marginal Pricing

Marc Comtois

Megan McCardle looked at Netflix/Qwikster and explains how the problem is a business model over reliant on marginal cost pricing. It's an object lesson that can be extended to, for example, health care costs.

[P]eople were confusing the marginal cost with the average cost. Content providers were willing to license their movies and television shows cheaply to Netflix as long as Netflix had a small customer base: it was extra revenue for the companies, and it was probably mostly substituting for DVD rentals, which they didn't make money off of anyway, so it was essentially free money.

You can get a sweet deal if you are the customer who gets marginal cost pricing. Medicare does this--reimburses hospitals at above their marginal cost, but below their average cost, so that private insurers have to pick up most of the hospital overhead. European countries do this with prescription drugs: reimburse above the marginal cost of producing the pills, but below the total cost of developing the pills, so that the US has to pick up most of the tab for drug development.

The problem is that as voters and as customers, we often get the notion that this can be extrapolated to everyone. So liberal policy wonks want to save money by putting everyone on Medicare, or some equivalent program that uses the government's monopsony pricing power to get lower prices for everyone; thrifty customers think that everyone should drop cable and just pay $14.95 for streaming plus DVDs.

But everyone cannot be the marginal cost consumer. Someone has to cover things like development costs.

That's the point that gets missed. Sure, living off marginal costs may work for a while, but eventually that R & D and infrastructure wears out and has to be replaced or replenished. We can only live off the work of previous generations for so long. No free lunch and all that. Eventually you have to pay to keep the same level of service.

September 7, 2011

Who Pays for Past Mistakes

Marc Comtois

Generational warfare: It's bound to happen here in Rhode Island with the pension crisis. It's also happening nationally on the budget deficit debate with the new Super Congressional panel set to convene. Education Policy wonk Rick Hess offers his perspective:

You're either with the kids or with those rushing to the ramparts to defend retiree entitlements. So, which is it?

Consider the President's vague calls last week to spend billions more on school construction and preserving school staffing levels (which would've been more compelling if he had offered any inkling as to how we might pay for it). Obama finds himself unable to do more than offer marginal, dead-on-arrival programs because the feds have spent more than half the budget just mailing checks to retirees, covering health care bills, and paying interest on the accumulated debt. Everything else—schools, financial aid, the FBI, defense, transportation, the environment, NASA, foreign aid, you name it—has to make do with what's left.

As Julia Isaacs at the Brookings Institution has pointed out, the federal government now spends about $7 on seniors for every $1 it spends on children....Do we really think it's a good idea to spend half of all non-interest spending on making retirement ever more comfy?

Past or future? Which will it be? He provides an important breakdown of we pay for current Medicare spending:

[T]oday's retirees have contributed taxes that amount to less than half their Medicare outlays. Today's Medicare payroll tax doesn't fund Medicare--it funds only Part A (hospital expenses). Premiums cover just 25 percent of Part B (doctor treatments and visits). And premiums for Bush's Medicare drug program (Part D) cover just 10 percent of the cost. The rest of the hundreds of billions in outlays for these programs is vacuumed out of general revenue. (See here for a good breakdown on Medicare funding.)

And Social Security:

Social Security has the government reflexively spending hundreds of billions to mail out monthly checks to the wealthiest segment of the population, without an ounce of thought as to whether that's the best use of borrowed funds (the famed Social Security "trust fund" being, you know, nonexistent). The Social Security Administration reports that more than 20 percent of those 65+ have incomes over $65,000 a year. In a nation where median household income is in the $40,000s, is it really radical to rethink how much we mail to these households every month?

As for taxes:

Toss in all of the tax deductions that President Obama called for eliminating this summer, including the corporate jet deal, and you address another $400 billion over 10 years, or less than 2 percent of the shortfall. So, just keeping the deficit from exploding will involve all those taxes and trillions more in cuts. Those demanding substantial new spending then need to raise hundreds of billions beyond that, through additional cuts or tax increases....Even with hefty tax increases, protecting existing entitlements ensures that we won't have much available for schools, colleges, or anything else.

He urges education advocates to step up to the plate and take on the AARP and similar groups so that more money can go towards kids and education.

In short, it's possible to get our house in order, free up dollars for schooling, and shift dollars towards youth. But doing so requires facing down the massive, intimidating seniors' lobby.

Shared sacrifice involves asking Baby Boomers and retirees to step up and, you know, sacrifice. It doesn't mean holding harmless the generations who voted themselves free stuff through the good times and doesn't rely almost entirely on raising taxes and curtailing benefits for the under-40 set.

Hess' bailiwick is education and his goal is to increase funding for it. Regardless of whether you agree or disagree with Hess' priorities, his argument helps to lay out the choice that needs to be made: should the people who benefited or made the mistakes in the past be held most accountable for those mistakes? Or should their kids and grandkids?

September 4, 2011

A Bad Economy Is in the Democrats' Favor Structurally

Workers giving up hope, thereby keeping the unemployment rate artificially low, is keeping Obama's reelection hopes alive. If the headlines screamed that unemployment was 11.4%, even I might begin to believe [that the U.S.A. would not give Obama a second term].

We've already begun to see commentary and political cartoons attempting to smear Republicans on the grounds that it's in their electoral interests for the economy to stay sour until the next election. There is some truth to that, but inasmuch as it's a bipartisan reality with every election, it's hardly a strong moral condemnation.

Rephrased, a bit, what Jacobson is saying is that it would help the Republicans if the statistics better reflected, to voters, how bad the condition of the economy really is. But there's a deeper way in which this particular data point helps the Democrats: Workers who give up move toward dependency on the government, and the Democrats are the party of dependency. If you're struggling to find work in the private sector, you're more apt to want the market to be free to thrive, to want employers to be given more space to invest and hire. Those who throw up their hands are thereafter more likely to put out their hands to collect whatever money the government directs toward them.

September 2, 2011

Green Fave of Obama's Goes Under, Taxpayers Foot the Bill

Marc Comtois

Solyndra is a manufacturer of solar panels--a green technology!--and was given half a billion dollars in loan guarantees by the Federal Government. Oh, and a major Obama donor, George Kaiser, was also a financial backer of the the company. Now it looks like they're going under:

A company that served as a showcase for the Obama administration’s effort to create jobs in clean technology shut down Wednesday, leaving 1,100 people out of work and taxpayers obligated for $535 million in federal loans.

Solyndra, a California solar panel maker, had long been an administration favorite. Over the past two years, President Obama and Energy Secretary Steven Chu each had made congratulatory visits to the company’s Silicon Valley headquarters....solar industry analyst Peter Lynch said that Solyndra struggled from the beginning with an imbalanced financial model.

“You make something in a factory and it costs $6, you sell it for $3, but you really, really need to sell it for $1.50 to be competitive,” Lynch said of Solyndra. “It was an insane business model. The numbers just don’t work, and they never did.”

August 22, 2011

One Sector of the Economy Booms: Government Regulation

Under President Obama, while the economy is struggling to grow and create jobs, the federal regulatory business is booming.

Regulatory agencies have seen their combined budgets grow a healthy 16% since 2008, topping $54 billion, according to the annual "Regulator's Budget," compiled by George Washington University and Washington University in St. Louis.

That's at a time when the overall economy grew a paltry 5%.

Meanwhile, employment at these agencies has climbed 13% since Obama took office to more than 281,000, while private-sector jobs shrank by 5.6%.

More than just the size and scope is changing, too. So is the attitude.

It has long been the case that regulatory agencies could utilize discretion in policing their realms. For instance, OSHA could reduce fines and work with companies to come into compliance by following a process that had the company accept or admit the violations and have fines reduced by 2/3 while also putting a payment plan in place. (This last is especially important to small companies who can't afford to pay the fine all at once, up front). No more. Apparently the Obama administration has directed OSHA to scrap that approach to "generate" as much "revenue" as possible.

The EPA will also become even more hardline and that will effect businesses and local governments (and your taxes). They've ordered the City of Newport to pay a $170,000 fine and spend $25M to fix a problem with their Waste Water treatment plant, after the city had already spent $32M to fix it (whether we can blame the EPA, City of Newport for incompetence--or both--is probably an open question). In addition, the EPA has now tightened their already tough regulations even more. Going from concentrating on so-called “point sources” (smokestacks, fan exhaust outlets, etc.) that emitted certain threshold levels of chemicals they have identified as hazardous wastes to regulating (and fining) any exposed amount of any of these chemicals found in a facility. The apparent theory being that opening a door allows pollution of the atmosphere.

Regulations impact jobs, especially on the small business level. Obviously, we need safe, clean work environments. But working with small companies, as has been done in the past, seems to have been, well, working. This new change in philosophy is both antagonistic and ill-timed, given the current state of our economy.

August 19, 2011

The Tone Deaf Ruling Class

The two-phase plan will require Obama to argue for spending more money in the short term while reducing the federal deficit over a longer period. Many economists support that combination, saying that cuts in spending should wait until the economy is stronger. But political strategists say it has been difficult to communicate that idea to voters.

Obama pushed the idea Wednesday during a stop in Alpha, Ill. "Yes, some of these things cost money," he said. "The way we pay for it is by doing more on deficit reduction."

Enough already! Stop with the stimulus spending. Stop with the gimmicks. Stop with the attempts to use anxiety about the economy to expand the government's size and scope.

It doesn't "pay for" increased spending to spend a little bit less money you don't have in other areas. That is, reducing the deficit doesn't mean that you can spend the reduction, unless you've crossed the zero mark and are no longer spending more than you take in.

August 8, 2011

What Goes Up... Taxes

Justin Katz

The other day, I made reference to the possibility that having an economy calibrated to two-income households, rather than the one-income households that were once the norm, is a hindrance on entrepreneurial ventures. Yes, if one spouse's attempt to create a business fails, the other spouse's income remains, but in the current marketplace, both incomes are necessary.

Since the effective doubling of the workforce, the market has adjusted household expenses, especially big-ticket expenses like housing, to the new normal income level. In an interesting spin-off discussion, Todd Zywicki ntoes that leading the big-ticket inflation is taxation:

Here's the key problem in Caldwell's argument: note his list of increased expenses for household "big necessities: mortgages (up 76 percent), cars (up 52 percent), taxes (up 25 percent), and health insurance (up 74 percent)." The problem is that while it is an accurate representation for mortgages, cars, and health insurance, that the expenses increase by that percentage, it is not for taxes. For the other expenses it is the percentage increase in dollars spent on those expenses. For taxes, however, the 25% increase is actually the percentage increase in the percentage of income spent on taxes. So the 25% is not how many more dollars go to paying taxes, it represents the household’s change from paying 24% of its income in taxes to 33% of its income in taxes–a change of 25% in the percentage of income dedicated to taxes, not a change of 25% in spending on taxes. I swear I am not making this up: I have attached to the bottom of this post the full excerpt from this book where this is done. And, again, I have laid this out in considerable detail previously here.

What this means is that once taxes are converted to an apples-to-apples comparison–percentage change in dollars instead of percentage change in percentage–household spending on taxes actually increased 140%, not 25%. The entire two-income trap, therefore, is actually a two-income tax trap, as I noted in my Wall Street Journal commentary on this awhile back.

Zywicki overstates when he declares that taxes constitute the "entire two-income trap." Even if taxes were the only expense to increase at all as a percentage of income, that wouldn't change the fact that it now takes two incomes to cover expenses that used to take one. That said, conservatives certainly aren't averse to arguing that we need to shrink government in both its activities and its expense.

August 5, 2011

And Down We Go

Standard & Poor's announced Friday night that it has downgraded the United States credit rating for the first time, dealing a huge symbolic blow to the world's economic superpower in what was a sharply worded critique of the American political system.

Lowering the nation's rating one-notch below AAA, the credit rating company said "political brinkmanship" in the debate over the debt the debate over the debt had made the U.S. government's ability to manage its finances "less stable, less effective and less predictable." It said the bi-partisan agreement reached this week to find $2.1 trillion in budget savings "fell short" of what was necessary to tame the nation’s debt over time and predicted that leaders would have no luck achieving more savings later on.

A Treasury spokesperson took the tack of belittling S&P, which is fine, as far as it goes, but won't do much to correct the nation's course.

Downness and the Debt Ceiling

Justin Katz

Yesterday, I gave some thought to shifts in government policy and in American culture that may ultimately be behind our economy's failure to recover satisfactorily. Much like the productive people who have been leaving Rhode Island because they've assessed that the opposition to needed reforms is simply too powerful, many Americans know what must be done but expect it to be near impossible to make it so. In that respect, the debt ceiling was like a small-scale prod at enemy lines to test the strength of its forces.

The standard line among Democrats, and even many Republicans, is that cutting government spending would just be too hard. All of the government's "promises" are sacrosanct  from Medicare to welfare programs to public school funding  and there simply isn't enough waste and fraud to be squeezed out of the system to cover the deficits (even if officials and bureaucrats were inclined to do the squeezing).

To be fair, they've got a point. A look at Kevin Williamson's prescription for government spending cuts shows just how many powerful groups would have to be bucked. That's certain to be a problem with democracy once elected officials realize that they can stitch together bought constituencies. Everybody's going to want their own ox to be the last one gored.

But cutting has to be done. Our government has been operating with a policy-first approach  assuming that the resources will be found to do whatever politicians and their backers think is right. Rhode Island is dying proof of the silent sunset clause in such an approach. If the federal government couldn't even be forced to abide by its already-astronomical borrowing limits  if it couldn't be forced to make honest-to-goodness, non-fudged and actual cuts to projected spending  then what hope is there?

Very little. If we collectively find it to be impossible to cut spending and begin mitigating our reliance on Big Government, it might be beyond impossible to change the cultural problems that underlie our approach to civics. Another bubble may come along and allow us another decade of ignoring the disease, as the Internet and housing bubbles did, but we'd only be worse off for it, in the long run.

As it happens, Mr. Williamson commented, yesterday, to one of my recent posts, saying that he's "given up writing about the deterioration of our culture," because there's "not much left to say." In a final analysis, the deterioration of our culture is the only thing to say. Repeating the common sense analysis of our errors is the only way to make people (gradually, culturally, almost subconsciously) shift their behavior and civic practices. Even if the necessary changes are beyond our society's abilities, right now, ensuring suffering on a massive scale and initiating the risk that our weakness might inspire global-scene-changing actions on the part of other peoples, the right path will be easier to find when we've come back around to it if it is well described.

August 4, 2011

Continuing Downness on the Economy

Justin Katz

Thinking further about an aspect the topic that I raised this morning  namely, things that prevent Americans from forging their own way in this economy  many additional factors came to mind. A huge one is debt.

On my short lunch break, I don't have time to go in search of the link, but I read recently that personal debt in the United States greatly exceeds government debt, which is a compounded problem beyond forcing future generations broadly to finance today's public spending. Even within a couple of generations, the typical family would have needed much less money just to survive because it would have lived within its means on an annual basis.

My in-laws bought their modest cape in Portsmouth for $15,000. For the sake of ease, assume the interest payments amount to a doubling of the ultimate cost of the house; that means they would havce wound up paying roughly $1,000 per year over the life of a thirty-year mortgage. A similar house now would cost somewhere around three-quarters-of-a-million dollars, with the same interest assumption, or $25,000 per year. Somebody who decided to go out on his or her own to start a business could live on just about that amount of money while ramping up, and somebody with a mortgage of that size will surely be significantly more reluctant to take on greater debt in order to invest in a business venture.

I'm simplifying, of course. Wages have inflated, as well, and the price of real estate has something to do with demand, and so on. But part of the reason that the market has borne a 2,000% increase in the price of a house is that our toleration for debt has grown immensely. It's not just mortgages, either. Consider college debt (which has arguably only inflated the amount of education that one needs for the same exact sort of work). Cars. Equity loans. Credit cards.

Speaking from personal experience, that all means that I would be insane to commit to business loans for, say, Anchor Rising. Given all of my existing debt, I need to make so much money just to pay each month's bills that I'd quickly eat up my investment in personal salary. And if the full-time writing activity didn't result in an adequate revenue stream, I'd wind up needing to earn even more money per month to pay off the loan.

Of course, Americans used to have more room in their personal finances for a host of other reasons. When the marketplace was calibrated to the idea of one-income households, a spouse was spare capacity. Whether the working man's wife found part-time work outside the home, helped her husband with business paperwork, or worked as a partner in a storefront, that was all extra income tacked onto basic priorities.

As with regulations, both the tolerance of debt and shifts in the culture have had justifications, but it may be that they've finally all added up to a society that so differs from its prime that decline is inevitable.

Why We're Down on the Economy

Derek Thompson touts these as "the 4 scariest economic graphs I've seen this year." Basically, they chart every recession of the last fifty years in terms of a percentage of the previous peak.

As a rule of thumb, I'm always skeptical about metrics that are multiple steps away from raw numbers, in this way. A peak is a single data point and can therefore skew a decade's worth of numbers because it was unnaturally high or low. If, for example, a housing boom predicated on loans from the the future causes a particularly large spike, then the following trough  when people realize the delusion under which they've been operating  will be particularly low.

That said, the first and last charts seem to me to suggest that eyes have been opened to more than just the insecurity of mortgage-backed securities. The first shows "Real Gross Domestic Product: Percent of Previous Peak," and after a five percent dip, by mid-2009, we're currently back to 99.5% of the prior high point. The last shows "Employment: Percent of Previous Peak," which bottomed out with a 6.5% drop by 2010 and has only recovered about 1.5% of its comparative strength.

It looks like investors and producers have discovered that they can turn a profit without employing Americans. And they won't fill their payrolls again unless some change in the market gives them reason to do so.

Alternately, competitors could duplicate the jobs available in a particular industry in order to build their own organizations, but that brings us to another thing that I think people are realizing: The United States is no longer as good a place to be an upstart company looking to squeeze out efficiencies in existing industries or fill niches that the big companies haven't noticed.

I'm not, here, talking about the lottery-ticket possibilities exemplified by Google and Facebook. Neither do I mean the investment-driven bids to attract large buyouts from behemoths wishing to pad portfolios of potential next-big-things. If existing companies are finding that they can maintain their bottom lines without the large expense of labor costs, then smaller companies ought to be able to leverage that capability to compete, therefore making it crucial that incumbents put their profits and reserves to the most efficient use possible, whether that means opening new branches or lowering prices.

If, for example, the large contractor across town finds that relatively inexpensive equipment and tools allow him to cut his crews in half and take the savings for himself, there's no reason his employees can't break off and use the same techniques to compete. They'll edge out the contractor's excess profits, but they'll be doing better, themselves.

Of course, my use of the phrase "no reason" is rhetorical, not accurate. Public policy creates all sorts of reasons that carpenters might not want to try their hand at contracting. There are layers of insurance that a business requires. Regulations that they must follow. Minute codes with which they must be familiar. Fees that they have to pay to gain this license or that registration. In Rhode Island, they have a $500 minimum tax if they organize as anything other than a sole proprietorship. If they hire other people, there are piles of paperwork to manage.

I'm using the construction industry emblematically, here, but Iain Murray notes that "the costs of regulation today amount to $10,000 per employee per year for small businesses in the U.S."

That's why the advert where a little girl borrows her father's phone to help run her lemonade stand and ends up running a multinational just can't happen. The bureaucrats just wouldn't let her do it without jumping through the costly bureaucratic hoops first.

He even links to a map set up to track towns that shut down kids' lemonade stands.

Sure, there are arguments to be made for each and every regulation on the books, but in favoring the impulses to regulate and tax and to protect consumers from their own unfortunate decisions, we've set up a system that protects organizations once they reach a certain level of establishment. This applies to the downtown barber who has the means to secure a license, pay minimum taxes, and make his shop fully compliant with regulations and building codes, and it applies to the bailouts of banks and automobile manufacturers that have established themselves as "too big to fail."

Charles Krauthammer is right, as a lot of us have said all along, that President Obama (and President Bush, before him) "did a huge Keynesian gamble, and it failed." That's because borrowing money from the future to inject into the current economy can only jump-start real growth if the specific economic downturn of the time results from a lack of funds and if those funds can flow to the segments of the market best situated to transform raw materials and human productivity into new dollars.

If the downtown barber and corner lemonade stand are all set to go but just need the union masons working on government road projects to stop in on their way home from work, then Keynesian stimulus might help. But if the barber and lemonade kid are prevented from doing what they do, the government money will just flow to SuperCuts and CVS, which will use the extra revenue to overpower competition and pad reserves.

In government, we face a spending problem, not a revenue problem, and in the economy overall, our shackles derive from regulation, not funds.

July 27, 2011

Loan Guarantees: Another Gimmick That Won't Spark Business Activity

A dozen companies – half of them out-of-state businesses looking to relocate to the Ocean State – are lining up to take advantage of the same controversial loan-guarantee program that drew Curt Schilling's video game company, 38 Studios LLC, to Providence.

Loan guarantees by the state are no way to lure and keep business here. It is simply not feasible for the state to expose itself to the amount of risk involved in backing a sufficient number of such loans to make a difference.

The pertinent correlation, of course, is between Rhode Island's abysmal business climate and its poor economy and corresponding employment figures. A spark to the latter will not ignite until Rhode Island's real EDC decides to step in and address the former with substantive regulation and tax/fee reform rather than continuing to sit on the sidelines with the rest of us watching the gimmick parade.

July 25, 2011

Letting the Spinners Get Away with Economic Baloney

Justin Katz

It's getting kinda hard to take the spin that permeates economic reporting. Reporter Kate Bramson and her headline writer mainly adopt RI Department of Labor and Training Director Charles Fogerty's line that the statistics show "slow, steady progress." The headline and lede are, "Rhode Island unemployment dips slightly, to 10.8 percent, Still, 10.8% an improvement over numbers for December," and the story deepens with this:

Job growth in Rhode Island is one of the positive trends in the first half of the year. Although the number of jobs dropped from May to June by 1,500, Rhode Island had 4,200 more jobs in June than in December. That six-month growth is an increase of 0.9 percent -- which Fogarty said is "outpacing the nation."

A quick glance at the accompanying table, mostly taken from the U.S. Bureau of Labor Statistics' page for Rhode Island unemployment, shows that, while the number of unemployed Rhode Islanders dropped by 4,891, the number of people working also dropped, by 5,362. That is, the overall labor force shrank by 10,153 and hasn't been this small since September 2009.

As for the increase of "jobs based in Rhode Island" since December, a closer look at the month-to-month statistics (which are all that are easily found) suggests that the uptick is mainly in construction and accommodation and food services, which can be expected to increase in Rhode Island this time of year.

July 19, 2011

Training for Jobs That Don't Exist

Justin Katz

Under normal circumstances, this program might be an unalloyed positive, and I do believe that every student should have some familiarity with construction and trades:

On Olmsted Way, a short street across from the Wanskuck Mill on Charles Street, 10 graduates of the YouthBuild Providence program are at work this summer, renovating 24 apartments in two buildings at the Olmsted Gardens affordable-housing complex. ...

In the YouthBuild Providence program, www.youthbuildprov.org, part of the national YouthBuild network, low-income youths ages 16 to 24 work to earn their GEDs or high school diplomas while also learning job skills by building affordable housing. Marques said the 10-month educational program includes alternating weeks of classroom work and on-the-job training.

The money for the program appears to come, ultimately, through the federal government, in part (one infers) by paying for the projects, which thereby operate with the inexpensive labor. But are public dollars spent on training for a flailing industry really a good idea?

The organization's Web site calls construction "a booming industry in our state that is poised for substantial growth." Another article in Sunday's Providence Journal, however, describes the industry's employment position as follows:

In building construction, slight job gains in commercial and industrial construction are being swamped by losses in residential, where foreclosures, tight credit and depressed prices have taken a toll. In June, residential and commercial building companies employed 1.2 million workers, down 15,900, or 1.3% from a year earlier, according to the Labor Department.

Back in October, Rhode Island led the nation in its percentage of construction jobs lost, and I haven't seen any evidence that much has changed. That means that job training programs focusing on building are adding low-end labor to an industry that already has a great deal of downward pressure on employment and salaries. And a 10-month program does so relatively quickly.

That sounds like a blueprint for stagnation for older workers and disappointment for new entrants to the trade. Were it a (gasp) for-profit program  with enrollees paying for their training  it would have to adjust to economic trends. With government funding, the folks making the financial decisions aren't those who stand to gain or lose by graduates' success or failure, and the bureaucracy in place to funnel the funds generates its own motivation.

July 18, 2011

Maybe If the Kitchen Table Is on a Yacht... with Servants

Justin Katz

This AP analysis  or whatever you would call such an essay  by Calvin Woodward and Martin Crutsinger is dumb to the point of being offensive. Woodward and Crutsinger try to put the debt ceiling debate in terms of family finances, and the lede that the Providence Journal gave to the story captures the error:

The choice in simple terms: Borrow more while fixing the budget, or refuse more debt, leave some bills unpaid and risk upheaval

Perhaps I'm not alone in thinking that the politicians' preferred option would actually be to borrow more without fixing the budget and then make the same threats and doomsday predictions when the problem comes around again. And what about the unmentioned option of living within one's means in the first place? President Obama offers a typically erroneous comparison:

"A family, if they get over-extended and their credit card is too high, they don't just stop paying their bills," he said. "What they do is, they say, how do we start cutting our monthly costs?

"We don't stop sending our kids to college, we don't stop fixing the boiler or the roof that's leaking. We do things in a sensible, responsible way."

The idea that our bloated government is so trim and efficient that the next cut will have to be to the roof maintenance budget is ridiculous on its face. But frankly, if a household is to the point at which it has to borrow forty cents of every dollar it spends, then it really has to think about selling the house and (contrary to the essay's authors) selling some assets is really not an extreme step.

Canada did it

In the 1990s Canada’s Liberal party government reduced its national debt and revived its economy by, among other things, reducing federal employment by 45,000 jobs, 14% of the total. The ratio of spending cuts to tax increases was nearly 7-1. Overall Canada’s economy, which grew by less than 1% annually between 1989 and 1993, grew by an average of 3.4% between 1994 and 2006.

July 8, 2011

Regarding the $2 Trillion in "Cuts" for the Proposed Raise in the Debt Limit Ceiling

Marc Comtois

CATO has put out a simple video explaining that the "drastic cuts" being bandied about ain't no such thing, they're just the typical political cuts (ie; a reduction in the previously projected rate of growth) (h/t):

"Unexpectedly" Bad Job Numbers

Marc Comtois

Glenn Reynolds has been noting the "unexpectedly" bad job reports for many months now. In other words, for some reason, news outlets, pundits and the government all seem to be surprised that the job market continues to stink. Month after month, they've amped up hopes that unemployment is going to go down while new job numbers leap up. Today's report was no different and also revealed that the past two months were--you got it--"unexpectedly" worse than originally thought.

The nation's unemployment rate ticked up to 9.2 percent in June from 9.1 percent the month before as businesses and government agencies added only 18,000 jobs to their payrolls, the Bureau of Labor Statistics just reported.

The number of Americans classified as unemployed rose to 14.1 million from 13.9 million in May...."The change in total nonfarm payroll employment for April was revised from +232,000 to +217,000," BLS reports, "and the change for May was revised from +54,000 to +25,000.

June 28, 2011

How the Economy Would Recover

It's kind of surprising to see this reported as news, but perhaps it's been so thoroughly forgotten among politicians and in the culture that it's actually a new discovery for journalists:

You get laid off. Your job search goes nowhere. Your savings dry up. Now what? The answer for many is as old as capitalism: Start a business.

This isn't the new Google, here. This is Bob's Landscaping and Junk Hauling or Alicia's Cake Baking and Daycare  whatever it takes to bring in a serious income. It might be a hobby or side business that morphed into a lifeline, but the key for most people is starting with relatively little capital  a lawn mower, computer repair tools, a sewing machine, all of which they might already own.

That's why the best approach to repairing the economy isn't to soften the experience of unemployment while throwing wads of debt-derived dollars into the economy. Rather, what's needed is to maintain a reasonable safety net while easing regulations.

Rhode Island especially needs to learn this lesson. Not only does the General Assembly look likely to tax new items (albeit many fewer than the governor wanted), but we frequently see the state and municipal governments ratcheting up fees, expanding fines, and otherwise making it more difficult to negotiate the economy.

June 24, 2011

Maybe It's Your Philosophy, Ben

The economy's continuing struggles aren't just confounding ordinary Americans. They've also stumped the head of the Federal Reserve.

Fed Chairman Ben Bernanke told reporters Wednesday that the central bank had been caught off guard by recent signs of deterioration in the economy. And he said the troubles could continue into next year.

What's the quote from Keynes? "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood." Maybe Mr. Bernanke needs to question whether he's getting something wrong from the point at which he makes assumptions about how the world works.

June 13, 2011

It Isn't a Jobless Recovery...

Only 58.4 percent of Americans are employed, the fewest since the 1980s. Corporations have recouped 100 percent of profits lost in the recession. GDP has regained its pre-recession level with 7.3 million fewer workers.

I think baby-boomers leaving the workforce at least partially accounts for the first number. Regardless, companies aren't going to add jobs back "just because." They will only do so if the growth justifies it. Instead, during this recession, companies learned that fewer workers can do the same work (or more) as before.

It’s easy to criticize corporations for raking in profits while millions of workers go unemployed or underemployed. However, the bottom line is that companies have adapted to the changing structure of the U.S. and global economies a lot faster than the American workforce has, and a great number of those workers have a lot of catching up to do.

Companies have adapted and streamlined and become profitable at current employment levels.

The push to bolster profitability has permanently altered the employment needs of many corporations, especially the mix of skills companies require. "We believe a large proportion of today's high unemployment is structural in nature, resulting from a huge skill mismatch between the jobs being created and the existing skill sets of jobseekers," says Wells Fargo economist Mark Vitner.

In other words, as the aforelinked article is titled, "some jobs are never coming back." Now workers have to adapt or be left behind, never to recover.

June 8, 2011

Increase Professorial Efficiency and Tuition Costs Will Go Down

Marc Comtois

Richard Vedder, an economics at Ohio University, explains that one way to cut college tuition costs would be to ask professors to, you know, teach more.

In a study for the Center for College Affordability and Productivity, Christopher Matgouranis, Jonathan Robe and I concluded that tuition fees at the flagship campus of the University of Texas could be cut by as much as half simply by asking the 80% of faculty with the lowest teaching loads to teach about half as much as the 20% of faculty with the highest loads. The top 20% currently handle 57% of all teaching.

Such a move would require the bulk of the faculty to teach, on average, about 150-160 students a year. For example, a professor might teach one undergraduate survey class for 100 students, two classes for advanced undergraduate students or beginning graduate students with 20-25 students, and an advanced graduate seminar for 10. That would require the professor to be in the classroom for fewer than 200 hours a year—hardly an arduous requirement.

Faculty will likely argue that this would imperil the university's research mission. Nonsense. First of all, at UT Austin, a mere 20% of the faculty garner 99.8% of the external research funding. Second, faculty who follow the work habits of other professional workers—go to work from 9 a.m. to 5 p.m. and work five days a week for 48 or 49 weeks a year—can handle teaching 200 hours a year while publishing considerable amounts of research. I have done just this for decades as a professor.

June 3, 2011

True Unemployment Numbers

Since November, the number of Americans counted as employed has grown by 765,000, to just shy of 139 million. The nation has been creating jobs every month as the economy recovers. The economy added 244,000 jobs in April.

But the number of Americans counted as unemployed has shrunk by much more — almost 1.3 million — during this time. That means the labor force has dropped by 529,000 workers.

The percentage of adults in the labor force is a figure that economists call the participation rate. It is 64.2 percent, the smallest since 1984. And that's become a mystery to economists. Normally after a recession, an improving economy lures job seekers back into the labor market. This time, many are staying on the sidelines.

Their decision not to seek work means the drop in unemployment from 9.8 percent in November to 9 percent in April isn't as good as it looks.

If the 529,000 missing workers had been out scavenging for a job without success, the unemployment rate would have been 9.3 percent in April, not the reported rate of 9 percent. And if the participation rate were as high as it was when the recession began, 66 percent, in December 2007, the unemployment rate could have been as high as 11.5 percent.

May 27, 2011

NOAA Run Amuck: Fraud, Waste and Abuse

The mayors of the region's two leading fishing ports Wednesday said a special master's report on miscarriages of justice by federal fisheries law enforcers described an "un-American" system that presumed guilt, and seemed consistent with a disrespectful view of fishermen they said permeates high levels of the agency.

"The penalties were shakedowns," said Mayor Scott Lang of New Bedford.

"The coercion was remarkable," added Mayor Carolyn Kirk of Gloucester. "It's unimaginable that this could be happening in America."

"Normally," Lang added, "people go to jail, but here they get transferred to a better climate." {as this editorial explains-ed.} ....[NOAA administrator Jane] Lubchenco led an entourage to Gloucester last Tuesday to meet with fishermen, issue an apology for failings of the law enforcement system, discuss a suit of reforms and announce the decision to return $649,527 in fines levied against elements of the commercial fishing industry which had its start here in the 17th century.

An investigation by the Commerce Department's Inspector General found the regulations were "unduly complicated." Federal agents "overzealous" and "abusive." Excessive fines including one for $270,000 for "administrative errors."

"We're honest hard-working people," [fisherman Richard] Burgess said. "And we have been treated as common criminals."

The inspector general found the $30 million the fishermen paid in fines went to a NOAA fund with no oversight. The fund was used by regulators to buy more cars (202) than agents (172,) and for trips to fishing conferences in exotic locales such as Australia, Malaysia and Norway. It was also used to purchase a $300,000 "luxury vessel" used by government employees for "fishing trips."

And according to this memo obtained by CBS News while under investigation NOAA officials in Washington had a "shredding party" destroying garbage bags full of documents.

As part of its fiscal 2011 Continuing Budget Resolution, Congress earlier this spring voted to bar spending on new catch share systems in the Atlantic and Gulf fisheries through the end of the fiscal year, but in response Lubchenco drew in grants from the Congressionally created non-profit National Fish and Wildlife Foundation and other foundations to fund future catch share systems.

May 24, 2011

Behind the Unemployment Headline

For the fourth month in a row, Rhode Island's unemployment rate dipped slightly in April to 10.9 percent, the first time in 21 months it has fallen below 11 percent.

Additionally, the number of jobs in the state grew by 1,800 from March to April to 462,200, according to data released Friday by the state Department of Labor and Training. April was the third month in a row the number of jobs in the state has grown.

Read a little farther  almost to the end of the article  and you find that "growth" can have strange meanings:

The number of unemployed Rhode Island residents dropped by 900 from March to April to 62,100. That’s 5,500 fewer people who are now counted as unemployed compared with April 2010.

Rhode Island’s labor force equaled 571,100 in April, down 900 from March, and down 5,100 from April 2010.

That is, on the month-to-month basis, the drop in unemployment and the number of people who left the labor force are an exact match. I'll withhold judgment on Rhode Island's pending recovery until such time as the unemployment rate falls because people who weren't working now are. Otherwise, the statement's a bit like declaring the health of our people to be improving because sick people have been dying off.

May 17, 2011

Jobs Saved and Destroyed

Justin Katz

I've long described President Obama's stimulus program as an attempt to insulate governments at various levels from the effects of the recession. The great bulk of the dollars flowed to states and municipalities in order to prevent budget cuts and, therefore, salary cuts and layoffs.

The problem with seeing the "just spend" approach as a means of jump starting the economy is that the government must take its spending money from somewhere, and to the extent that it collects it immediately in taxes, it changes its productivity incentive from making a profit to making busy work. The former is clearly a more efficient way of creating wealth.

And to the extent that government borrows the money that it spends  obligating the country to repay  it is merely shifting money from future productive uses, with interest. Moreover, given the role of investing in the economy (spanning from the stock market to home buying), which is in a sense a gamble about where wealth will be in the future, that money from the future can now no longer be borrowed for more productive uses.

In other words, in principle, there's little difference between taxing and borrowing in this regard, although the degree to which each saps the private economy to benefit the public may differ dollar for dollar. That brings us to an economic study highlighted by PowerLine, finding as follows:

Our benchmark results suggest that the ARRA created/saved approximately 450 thousand state and local government jobs and destroyed/forestalled roughly one million private sector jobs. State and local government jobs were saved because ARRA funds were largely used to offset state revenue shortfalls and Medicaid increases rather than boost private sector employment. The majority of destroyed/forestalled jobs were in growth industries including health, education, professional and business services.

Stimulating the government necessarily dulls the economy, and there appears to be a reverse multiplier effect of sorts.

May 10, 2011

Debt Versus Economy

Justin Katz

Too much can be made by each individual organization's predictions, but there's something disconcerting about this:

PIMCO's Bill Gross, the manager of the world's largest bond fund, raised his bet against U.S. government-related debt in April to 4 percent from 3 percent, according to the company's website on Monday. ...

Gross told Reuters on Friday: "Treasury yields are currently yielding substantially less than historical averages when compared with inflation. Perhaps the only justification for a further rally would be weak economic growth or a future recession that substantially lowered inflation and inflationary expectations."

April 29, 2011

A Couple of Narrower Economic Debates

Justin Katz

The other day, I mentioned the International Monetary Fund report suggesting that, by a "purchasing power," China would surpass the United States economically in 2016. Stephen Green isn't buying the "purchasing power" thing:

Measured dollar-for-dollar, China's GDP is less than half that of the United States’  it's only by measuring "Purchasing Power Parity" that the numbers are even close, even all the way out to 2016. Per capita, most Chinese are quite poor, making little more than $4,000 a year. Grade on the PPP curve, and your average Chinese still makes only around $7,500. Per capita GPD in the U.S. is a much-comfier $47,132.

Of course, there's also the major consideration, which ought to be read into every study, that projections could be wrong  whether the error manifests in a gradual shift from expectations or a sudden boom or collapse.

While I'm on the topic of debates about economics and the metrics thereof, Al Lewis offers this opinion in the battle between Treasury Secretary Tim Geithner and Standard & Poor's:

S&P last week announced there's a 1-in-3 chance it will lower America's Triple-A credit rating, a move that would force higher interest rates on a debt-bloated nation.

Reading between the lines, one comes to suspect that Geithner's premise is based on the possibility of ever-increasing debt. Less-commonly mentioned are the huge number of assets that the government could sell to avoid default. Of course, the list to be found via the link concerns itself with financial assets and doesn't even begin to list such things as publicly held land that could be sold.

More interesting than the flat denial, though, is the pro-government spin of a left-wing think tank and Lewis's response:

Then there's S&P. "S&P has a horrible track record for judging credit worthiness," wrote Dean Baker of the Center for Economic and Policy Research. "It rated hundreds of billions of dollars of subprime backed securities as investment grade. It also gave Lehman Brothers, Bear Stearns, and Enron top ratings right up until their collapse. Furthermore, no one was publicly fired for these extraordinary failures."

S&P's legacy of risk mismanagement, however, comes from overrating incompetent and even criminal enterprises where it had grotesque financial incentives to do so. Not for downgrading things amid clearly downward trends. Still, what kind of company believes in Enron, yet loses faith in the U.S.A.?

Several answers are available to that last question. First, if S&P's tendency is to err toward optimism, it could be the case that the United States is in dramatically worse shape than Enron, just propped up by its power to tax and wage war. Second, the government's financial dealings are much more in the open than Enron's, so it's possible to be more accurate. And third (to throw a bone to the pro-government folks), S&P could see organizational advantage to threatening a downgrade of the U.S.

April 27, 2011

The Young and Unemployed

As the old song goes, the children are the future, and in discussing the effects of our graying workforce, John Kostrzewa worries about Rhode Island's:

Eleven percent of the 107,108 people ages 22 to 29 who lived in Rhode Island in 2008 moved out in 2009. That's 11,200 young people.

The numbers are even scarier when you break out college educated Rhode Islanders.

One in five who were here in 2008 had left in 2009, largely because they couldn't find a job.

Kostrzewa's mainly addressing the effects of our long-running downturn, but since I arrived in the late '90s, it's been the common wisdom in Rhode Island that young adults had to leave to find opportunity. The Great Recession just exacerbated what was already a problem, and as factions fight over slices of the public pie and beneficiaries demand that the pie be expanded through taxation, necessary priorities come into stark relief.

After all, what's the point of Rhode Island's generous "investment" in education if the products of our efforts  highly educated young adults  simply leave? Increasing taxation and making it harder to do business in the state in order to prop up an inefficient educational system of questionable quality has the steps backwards. The state has to reorder its priorities, and the people who make public decisions (and those who pull their strings) are manifestly disinclined to do so.

Fixing Rhode Island's cyclic financial problems at this end-game point in time is like trying to remove a horned toad that has inflated itself in crack deep between two jagged desert rocks while it bites and hisses and squirts defensive blood at you out of its eyes. Any herpetologist knows that once it has retreated in there, it's too late and it's time to move on to another location. Lots of other states to choose from in the United States.

Or, as Mark Patinkin put it, while explaining that RI's elected leaders have to do what's necessary, even if it means the end of their political careers:

One can say many public employees  especially those doing risky jobs like cops and firemen  deserve such pensions. Even I think they do. But sadly, we are past the point of talking about "deserve." We're in the realm of "afford."

Pensions are only a heavily bleeding part of the wound. Rhode Island has to make subjective notions of fairness and desert secondary to functional possibility. Social services have to be curtailed; the education system has to stop being managed under the assumption that more money means better results; and regulatory manacles have to be removed from businesses, even if it means that the state no longer micromanages everybody's safety and, yes, even if it means that people get rich.

April 26, 2011

Time to Stop Being an Ostrich

Marc Comtois

When Ernst & Young, one of the Big 4 professional services firms, releases a study (PDF) that says Rhode Island is one of the worst in the nation for tax competitiveness when it comes to attracting new business, you'd better listen.

This study provides a state-by-state comparison of the tax liabilities that new investments in selected industries or types of economic activities would incur in each state, taking into consideration state and local statutory tax provisions and the financial and economic characteristics of the new investments. The analysis focuses on capital investments in industries that have location choices, such as factories or headquarters, rather than those that are tied to a specific geography, such as retailers or hotels. The estimated tax burdens on selected investments are combined to provide an overall measure of the business tax competitiveness of each state.

Rhode Island is #49, to be specific (only Washington, D.C. and New Mexico are worse. Maine--yes, Maine--is #1). What particularly seems to hurt Rhode Island are property taxes, especially the effective 5.36% tax on commercial equipment. (Massachusetts and Connecticut are at 2.71%).

The usual advocates can debate and reframe and reshape the debate all you want in an effort to raise taxes on the rich and "big business". No matter how persuasive you may be, businesses don't care. They aren't coming here: E & Y have provided a first filter for them. And the businesses that are here may take a second look. They'll leave. Because business people listen to someone like Ernst & Young. Will Rhode Island?

Move Out of the State? That Might Only Buy You Some Time

Marc Comtois

Former RI Auditor General Ernest Almonte says moving out of the state is, right now, about the only way that Rhode Islanders can avoid paying the $13,000 apiece we "owe" to fund public employee retirees (present and future). This is the big headline that came out of a conference held at URI last night.

Also discussed was the Pew Center for the States research (RI fact sheet in this PDF), which found that Rhode Island had only 59% of its $11.5 billion pension liability covered in 2009, ahead of only five states (Illinois, 51%; Kentucky, 58%; New Hampshire, 58%; Oklahoma, 57%,West Virginia, 56%). However, as General Treasurer Gina Raimondo pointed out, Rhode Island is now even worse off (probably because of the recent decision to re-set the pension rate of return) and now sits at 48%. Worst in the nation. Yay.

Raimondo was on with Dan Yorke earlier in the day and left little doubt that we are screwed and that there is no more road left to kick the can down. She sounds ready to dig in and fix things. She said it wasn't "a problem" but "THE problem" facing the state right now. Unfortunately, Raimondo still seems to be clinging to the idea that a defined benefit plan--rather than moving to 401(k) style defined contribution plans--is still a viable option. I don't think so.

The paradigm is shifting whether we like it or not. Promises were broken and it sucks. But it's economic reality: there is no money. We have to deal with current pensions and benefits, not just "future" pensions and benefits for workers not yet hired. That was the easy, low-hanging fruit. It's time for politicians--the people who are supposed to lead--to step up and really deal with this. That's why they were elected. If they don't, we'll have to find someone who will.

April 25, 2011

The Reign of Obama May Close Out the Age of America

Justin Katz

It's not the current president's fault (although many of us would be inclined to suggest that he hastened the end result), but if Barack Obama wins a second term, it may be that he'll turn out the lights on the Age of America... at least according to the International Monetary Fund:

According to the latest IMF official forecasts, China's economy will surpass that of America in real terms in 2016  just five years from now.

Put that in your calendar.

It provides a painful context for the budget wrangling taking place in Washington, D.C., right now. It raises enormous questions about what the international security system is going to look like in just a handful of years. And it casts a deepening cloud over both the U.S. dollar and the giant Treasury market, which have been propped up for decades by their privileged status as the liabilities of the world’s hegemonic power. ...

The IMF in its analysis looks beyond exchange rates to the true, real terms picture of the economies using "purchasing power parities." That compares what people earn and spend in real terms in their domestic economies.

Brett Arends, who wrote the above, suggests that the Age of China won't be as benign a hegemony as has been the past few "ages" dominated by Western democracies. He also quotes NYU Stern business professor Ralph Gomory as suggesting that the United States has "traded jobs for profit," leading to "a small, very rich class and an eroding middle class."

On the latter count, I'd say that business leaders' transition of jobs to lower-cost foreign markets is only part of the story. As seems to be a repeating theme, in our society, the trouble arises by our failure to follow a particular governing philosophy. What I mean is that the pursuit of cheaper labor for reasons of profits has had to combine with government imposition of regulations, mandates, and other market controls in order to trip up the United States.

With ever-increasing barriers to entry, the middle and working classes have been unable to compete with established companies, decreasing the risk for the internationals in turning toward distant employees. Displaced workers, and those who would employ them, have also been restricted in their ability to explore new means of making a living.

The way through this is to trust in the American people by removing government manacles, despite the fears and selfish interests of our ruling class, and begin to rebuild the character of the nation.

April 21, 2011

Americans Get More Tax Revenue Then They Send

Households received $2.3 trillion in some kind of government support in 2010....that’s more than the $2.2 trillion households paid in taxes, an amount that has slumped largely due to the recession, according to an analysis by the Fiscal Times.

Also, an estimated 59% of the 308.7 million Americans in this country get at least one federal benefit, according to the Census Bureau, based on 2009 data. An estimated 46.5 million get Social Security; 42.6 million get Medicare; 42.4 million get Medicaid; 36.1 million get food stamps; 12.4 million get housing subsidies; and 3.2 million get Veterans' benefits.

And the handouts from the government have been growing. Government cash handouts account for a whopping 79% of household growth since 2007, even as household tax payments--for things like the income and payroll tax, among other taxes--have fallen by $312 billion.

That is a tough feeding trough to take away from voters....In short, Americans have the government, not private enterprise, to thank for their wealth growth....does that mean those households are more inclined to re-elect politicians who are pushing for more government handouts?

Does the workforce erode because it is easier to collect a check than answer to an alarm clock each morning?

President Obama and Democrats have relied upon keeping the trough full to keep political power. It has proven effective time and again (David Cicilline, anyone?). Republicans aren't blameless either (earmarks, pet projects and the like). The mindset isn't new, but that it may be taking hold of a majority of Americans could be a dangerous tipping point.

April 15, 2011

Not Working: A Society in Decline

Justin Katz

A USA Todaystudy finds that the percentage of Americans not working hasn't been higher since women began entering the workforce, and the percentage of men who are working has never been lower. Moreover:

In 2000, the nation had roughly the same number of children and non-working adults. Since then, the population of non-working adults has grown 27 million while the nation added just 3 million children under 18. ...

The aging of 77 million Baby Boomers born from 1946 through 1964 from children to workers to retirees is changing the relationship between workers and dependents.

Retirees generally are more costly to support than children.

Fewer children. More non-employed. A wave of pending retirements. Now stir this in:

A quarter of teenagers were jobless in March, representing a surprising increase from February, even as the unemployment rate for the rest of the population decreased.

So, not only are there fewer children, but fewer of them are forming the habits and skills of working.

The article about teen unemployment notes economists' expectation that increasing the minimum wage will only exacerbate things, as employers eliminate low-end positions that they can no longer afford and look for higher-skilled employees to fill the more-expensive positions that they keep. Meanwhile, the first article linked above ends with this:

Economist Eileen Applebaum of the liberal Center for Economics and Policy Research says the real problem is a lack of jobs. Another 25 million people would work in a healthy economy, and incentives such as child care assistance could help, she says: "We're getting richer. We can afford things. We just need to fix what needs to be fixed."

Those of us who are suspicious of the Left's ability to do such fixing might wonder how its solutions address the actual problem by continuing to expand and deepen dependency  of parents on government and of the young on parents and government. That strikes me as the opposite of the wise direction.

Indeed, progressives' proposed policies always represent a further step in the progression of covering up and papering over the adverse consequences of previous changes. Even with male exodus from the workforce and decreasing numbers of children, and decreasing proportions of them working, we're still hearing calls to somehow force the system to shift in favor of women to compensate for a debatable wage gap. Moreover, we're hearing calls to continue the dilution of marriage by severing the inherent link between it and childbirth.

Western civilization spent much of the past half-century undermining the family structure that secured its advancement toward prosperity. Papa Government isn't going to fill the gap, because the nuclear Western family ultimately encourages independence, while government encourages dependence. Parents will inevitably die; Big Government is eternal, unless killed.

April 13, 2011

The Insidiousness and Destruction of Decades of Incremental Tax Increases

Monique Chartier

In response to the protest rally held by the business community yesterday at the State House, the governor asked for proof that his proposed massive broadening of the sales tax will damage Rhode Island businesses.

Rhode Island currently has the fifth highest state and local tax burden. It also has one of the worst business climates in the country - the latter due in part to the high cost of doing business here in which a myriad of government regulations, taxes and fees features prominently. (Boiler fee, anyone?)

However, these conditions did not evolve overnight. One by one, such regulations, taxes and fees were added. And then, one by one, many of them were expanded or increased, sometimes repeatedly; in the case of the fire code, to a ridiculous degree. As this happened, Rhode Island slowly evolved into its current status of business and property-owner unfriendliness. In response, one by one, businesses moved out of the state; naturally, taking jobs with them in the process.

This, then, is the fulfillment of the governor's assignment: the proposed massive broadening of the sales tax is a continuation of a decades-long practice that has slowly but inexorably driven business out of the state.

If we're ever going to pull out of this downward spiral, we need to head in the opposite direction. Regulations need to be addressed. And let's come to grips with the budget's structural problems so that we can begin decreasing taxes and fees rather than once again doubling down on failure and increasing them.

Feminist hand-wringing about the wage gap relies on the assumption that the differences in average earnings stem from discrimination. Thus the mantra that women make only 77% of what men earn for equal work. But even a cursory review of the data proves this assumption false.

The Department of Labor's Time Use survey shows that full-time working women spend an average of 8.01 hours per day on the job, compared to 8.75 hours for full-time working men. One would expect that someone who works 9% more would also earn more. This one fact alone accounts for more than a third of the wage gap.

Choice of occupation also plays an important role in earnings. While feminists suggest that women are coerced into lower-paying job sectors, most women know that something else is often at work. Women gravitate toward jobs with fewer risks, more comfortable conditions, regular hours, more personal fulfillment and greater flexibility. Simply put, many women—not all, but enough to have a big impact on the statistics—are willing to trade higher pay for other desirable job characteristics.

Men, by contrast, often take on jobs that involve physical labor, outdoor work, overnight shifts and dangerous conditions (which is also why men suffer the overwhelming majority of injuries and deaths at the workplace). They put up with these unpleasant factors so that they can earn more.

Recent studies have shown that the wage gap shrinks—or even reverses—when relevant factors are taken into account and comparisons are made between men and women in similar circumstances. In a 2010 study of single, childless urban workers between the ages of 22 and 30, the research firm Reach Advisors found that women earned an average of 8% more than their male counterparts. Given that women are outpacing men in educational attainment, and that our economy is increasingly geared toward knowledge-based jobs, it makes sense that women's earnings are going up compared to men's.

I hope it's obvious that equal pay for equal work regardless of gender, creed, etc. is desirable. Stories like this relying on a simplistic statistical reading are meant to generate controversy, continue to foment a "battle of the sexes" mindset and, gee whiz, just maybe make it appear that feminist culture warriors are still relevant.

April 7, 2011

It's Been a Good Decade: Why Public Employees Make So Much of Freezes or Minor Cuts

Marc Comtois

To those of us not in the public sector, it seems outsized when public employees and politicians make so much of temporary pay freezes or a few minor cuts (or reductions in the expected increases!). Red Jahncke adds some context that will help us understand their perspective by explaining how, nationwide, local and municipal government employee compensation has outpaced the private sector. He backs it up with two tables (6.2D and 6.5D) from the National Product and Income Accounts of the U.S. Bureau of Economic Analysis.

Table 6.2D shows that, nationally, state and local government worker compensation grew 45 percent from 2000 to 2007 — plus another 8 percent in the next two recession years, while private-sector compensation grew only 33 percent from 2000 to 2007 and — surprise, surprise — fell 3 percent in the recession. [Incidentally, the chart also shows that Federal Gov't grew 52% 2000-07, 11.5% during the next two recession years~ed.].

Table 6.5D reveals that, during the 2007-2009 recession, private-sector employment fell by 8 million jobs to a level below its total in 2000, while state and local public-sector employment grew by 185,000 jobs, reaching 1.3 million, or 9 percent, above its total in 2000.

As Jahncke notes, public sector salaries were ahead of private before the Great Recession. He continues:

The 2007- 2009 data speak to the issue of fairness — massive job losses and pay cuts in the private sector, continued job gains and a smart compensation boost in the public sector. In 2010, relatively few jobs were regained in the private sector or lost in the public sector.

And the data for the full decade speak to the issue of sustainability: How can slower-growing private-sector income produce the taxes to fund a public-sector payroll growing at almost twice the pace?

The answer is that it can’t, and it isn’t.

So now we get even Democrats making cuts and both they and the unions think they're making significant sacrifices. Given their experience over the last decade, I can understand why they think that. But they have to understand that the sacrifices they are making now have already been wrung from private sector employees over the last decade. So forgive us if we don't hail them as martyrs for giving some of what they earned--even during the Great Recession--back.

March 14, 2011

Suprise! Most of Government Stimulus Stimulated Government

Marc Comtois

The ProJo tried to figure out where the $1.9 billion in stimulus money that has been spent in Rhode Island has gone (funds can be spent as late as 2015). The ProJo included a chart of the "Top stimulus winners in R.I.", insofar as what it could determine (apparently, not all entities--such as Medicaid, food stamps, unemployment--need to report their stimulus take).

Basically, according to the ProJo, at least half of the money (conservatively) has gone directly to government and quasi-government agencies. When it didn't, it went to private enterprises doing government work (Gilbane Building Co. and Brown University). When combined with the unreported numbers, pretty much all of the stimulus went to maintaining or enlarging government expenditures.

March 11, 2011

Remember, Government Doesn't Budget Like We Do

Marc Comtois

When we say we're going to cut what we spend on, say, ice cream at my house, that means we either buy less, wait for sales or just stop buying it. So let's say, instead of $5 a week, we'll shoot for $4/week. We just cut the ice cream budget by $1. As Jonah Goldberg reminds us, that's not how governments define a "cut":

By earth-logic, if you got a raise of 10 percent last year, but this year you're only getting a raise of 8 percent, you're still getting a raise. On Planet Washington, that qualifies as an indefensible slashing.

So when the GOP cut $4 billion from the budget last week, the Democrats acted as if it was an involuntary amputation.

Now the GOP wants to cut $61 billion of discretionary nondefense spending from the total budget of $3.7 trillion, and Democrats are responding as if this will spell the end of Western civilization.

But given their terror of forcing a government shutdown, Democrats were forced to counteroffer with a cut of $10.5 billion, or 0.28 percent of the federal budget.

Imagine you have a budget of $10,000 (about 40 percent of it borrowed on a credit card), then "slash" 28 bucks. That's what it's like to be a frugal Democrat....In 2007, the budget was 19.6 percent of the GDP. In 2009, it went up to 25 percent of GDP. That's where the Democrats would like to see it stay.

What happened? The financial crisis, of course. But as many of us suggested at the time, one of the Democrats' real motives behind the stimulus was to inflate the "baseline" budget so that huge increases would never be reversed, thanks to the DC logic that a cut in growth is a cut.

Back to the ice cream. Let's say we spent $4/week in 2009 and $5/week in 2010 and expected our budget to increase (following the pattern) to $6/week in 2011. But we re-assessed and decided that, instead of the $6/week we projected, we would "freeze" our spending at $5/week. Hence, in government speak, we just cut our bill by $1/week. Even though we did nothing.

February 15, 2011

Desires as Economic Development

Justin Katz

Reacting to Governor Chafee's mention of it, Ed Fitzpatrick has read Richard Florida's book proclaiming the importance of tolerance to the economy and expresses, it seems to me, an appropriate skepticism regarding causation and correlation:

"My research finds a strong correlation between, on the one hand, places open to immigrants, artists, gays, bohemians and socioeconomic and racial integration, and on the other, places that experience high-quality economic growth," Florida wrote. "Such places gain an economic advantage in both harnessing the creative capabilities of a broader range of their own people and in capturing a disproportionate share of the flow."

I believe it was Snooki who first said: Correlation is not causation. In other words, just because there is a "strong correlation" between tolerance and economic growth doesn't mean tolerance causes economic growth. Perhaps that is a point both Chafee and his critics gloss over.

As I suggested a few weeks ago, it seems to me that urban areas, especially with high concentrations of colleges, are likely to attract creative types regardless of an Nth degree of tolerance for them. Indeed, one might suppose that a region experiencing "high-quality economic growth" might generally attract people who are different from the native population.

In any event, even if "tolerance" deserves its place as one of three economic legs (talent and technology being Florida's other two), that doesn't mean that it is the one on which Rhode Island is deficient. Personally, I'd put aside the "three Ts" as an interesting post facto analysis with only indirect influence on Rhode Island's economic health and focus, instead, on the more specific metric of economic freedom as indicated by taxes, mandates, and regulations.

February 7, 2011

U.S. Manufacturing Leads the World (Still)

Marc Comtois

I mentioned a few days ago that U.S. manufacturing continues on an upward trend. Jeff Jacoby makes the point that, despite what we hear and feel, U.S. manufacturing still leads the world by a wide margin:

Americans make more “stuff’’ than any other nation on earth, and by a wide margin. According to the United Nations’ comprehensive database of international economic data, America’s manufacturing output in 2009 (expressed in constant 2005 dollars) was $2.15 trillion. That surpassed China’s output of $1.48 trillion by nearly 46 percent. China’s industries may be booming, but the United States still accounted for 20 percent of the world’s manufacturing output in 2009 — only a hair below its 1990 share of 21 percent.

“The decline, demise, and death of America’s manufacturing sector has been greatly exaggerated,’’ says economist Mark Perry, a visiting scholar at the American Enterprise Institute in Washington. “America still makes a ton of stuff, and we make more of it now than ever before in history.’’ In fact, Americans manufactured more goods in 2009 than the Japanese, Germans, British, and Italians — combined.

American manufacturing output hits a new high almost every year. US industries are powerhouses of production: Measured in constant dollars, America’s manufacturing output today is more than double what it was in the early 1970s.

So why do so many Americans fear that the Chinese are eating our lunch?

The answer is that American workers are more productive than ever and we don't require thousands on the factory floor doing piecework to produce stuff. Jacoby:

Consequently, even as America’s manufacturing sector out-produces every other country on earth, millions of young Americans can aspire to become not factory hands or assembly workers, but doctors and lawyers, architects and engineers.

Perceptions also feed the gloom and doom. In its story on Americans’ economic anxiety, National Journal quotes a Florida teacher who says, “It seems like everything I pick up says ‘Made in China’ on it.’’ To someone shopping for toys, shoes, or sporting equipment, it often can seem that way. But that’s because Chinese factories tend to specialize in low-tech, labor-intensive goods — items that typically don’t require the more advanced and sophisticated manufacturing capabilities of modern American plants.

A vast amount of “stuff’’ is still made in the USA, albeit not the inexpensive consumer goods that fill the shelves in Target or Walgreens. American factories make fighter jets and air conditioners, automobiles and pharmaceuticals, industrial lathes and semiconductors. Not the sort of things on your weekly shopping list? Maybe not. But that doesn’t change economic reality.

Of course, to maintain our position, we need to continue educating our work force to be competitive in the future.

February 4, 2011

Harvard Study: 4 Year Colleges Aren't for Everyone

The U.S. is focusing too much attention on helping students pursue four-year college degrees, when two-year and occupational programs may better prepare them for the job market, a Harvard University report said.

The “college for all” movement has produced only incremental gains as other nations leapfrog the United States, and the country is failing to prepare millions of young people to become employable adults....Most of the 47 million jobs to be created by 2018 will require some postsecondary education, the report said. Educators should offer young people two-year degrees and apprenticeships to achieve career success, and do more to ensure that students who begin such programs complete them, said Robert Schwartz, academic dean at Harvard’s education school, who heads the Pathways project.

“For an awful lot of bored, disengaged kids who are on the fence about completing high school, they need to see a pathway that leads them to a career that is not going to require them to sit in classrooms for the next several years,” Schwartz said yesterday in a telephone interview.

This is an area of education reform that should get more attention. The report can be found HERE (PDF).

Checking Out of the Race

Justin Katz

The Lonely Conservative (being from New York state) has posted an email from an online acquaintance that voices a sentiment with which increasing numbers of us are surely familiar:

And I watch countless news stories about people who are criminals (illegal aliens, felons) liars, cheats, or just stupid getting help with their mortgage loans because they "need it". And people getting free medical services because they "need it". And people declaring bankruptcy because it's just too hard to pay the bills, they "need to". All the while I see my government crushing people like meexpecting us to just keep doing, just keep paying, just keep being responsible in order to make up for all of those people who were not.

My mind has drifted in much the same direction as I've watched the mail, eager for all of my tax documents to come in so that I can get the refund that will make me able to stop the calls from collection agents. It would have saved us substantial money in late fees to have had that money dispersed with our regular paychecks, rather than siphoned off as a free loan for wild-spending governments.

Some substantial mistakes on my family's part have made us slaves to debt, and it is a daily temptation just to walk away. As it is, we've pared our lives down to minimal expense, and frankly, as we offload the debt, I'm planning to use that space to ease my workload rather than chase lifestyle improvements. Productivity just isn't worth it, unless it's in line with something that you're passionate about regardless of pay.

The receding economy has revealed some stones that lay just below the water, and the blogger above suggests that the sight of them is changing Americans' perception:

My friend is the "Forgotten Man" of our day. Most of us are. How far away are any of us from feeling just as she does? It's one thing to go through these challenges knowing we're all going through it. But we aren't all going through it. Because we now have four Americas:

1-The public employee union class

2-The entitled/welfare class

3-The elite ruling class

4-The rest of us who are paying dearly to support #s 1, 2 and 3

In my industry, I've watched employees eager for layoffs, who game the system to get back some of what they've invested in it. One contractor recently expressed his disapproval of that tendency, calling it immoral to leach of the system and pass the buck on to him. I was actually surprised at my own disagreement. Until very recently, I'd have nodded along; now, I have to admit sympathy for the opposing view.

It's most definitely wrong to pass the burden of one's galtishness on to those who are still striving to produce, but it's all too easy to see the target as the giant tumor of a system that lays across us all, taking the money that would allow us to repair windshields and fill oil tanks in order to finance lavish benefits and years of unemployment checks and then borrowing money from our future labor and that of our children and grandchildren in order to bolster public-sector employees through the recession and promise the time-delayed boon of pensions.

We're all limited in the length of our view, especially when it comes to social and cultural matters. We can only know so many people and have personal experience with so many walks of life. I do worry, though that something in that unique American attitude is changing, and it won't be healthy for anybody involved. It's not too late  I have faith  but much will depend on the ways in which our leaders address the various crises that we now face.

February 3, 2011

SEC Investigating RI

Marc Comtois

WPRI's Ted Nesi has broken the story that the SEC is looking into Rhode Island's muni bonds. Nesi has Gen. Treasurer Raimondo's statement on the matter and also points to a New York Timesarticle on how the SEC is investigating Illinois' pension funding mechanism, which is similar to Rhode Island's. Basically, it has to do with reducing the pension liability for future workers:

Earlier this year, Illinois said it had found a way to save billions of dollars. It would slash the pensions of workers it had not yet hired. The real-world savings would not materialize for decades, of course, but thanks to an actuarial trick, the state could start counting the savings this year and use it to help balance its budget....The maneuver, and techniques that have similar effects, are already in use in Rhode Island, Texas, Ohio, Arkansas and a number of other places, allowing those states to harvest savings today by imposing cuts on workers in the future.

Texas saved millions of dollars this year after raising its retirement age for future hires and barring them from counting unused sick leave in their pensions. More savings will appear in coming years. Rhode Island also raised its retirement age for future retirees last year, after being told it could save $90 million in the first year alone.

Basically, politicians took the easy way out (surprise!):

Struggling states and cities need to save money, but they run into legal problems if they tamper with the pensions their current workers are building up year by year. So most places have opted to let current workers and retirees go unscathed. Colorado, Minnesota and South Dakota are the exceptions, dialing back cost-of-living increases for people who have already retired. All three states have reaped meaningful savings right away, and all three are being sued.

Cuts for workers not yet hired do not save much money in the present — but that’s where actuaries can work their magic. They capture the future savings for use today by assuming, in essence, that 100 percent of today’s work force is already earning tomorrow’s skimpier benefits. When used in actuarial calculations, that assumption has a powerful effect. It reduces the amount a government must put into its workers’ pension fund every year.

That saves the government money. But it undermines the pension fund, which must still pay the richer benefits of today’s retirees. And because the calculations are esoteric, it is hard for anyone except a seasoned actuary to see what is going on.

January 28, 2011

US Manufacturing Output is Up, But What About Jobs?

Since 1975, manufacturing output has more than doubled, while employment in the sector has decreased by 31%. While these American job losses are indeed sobering, they are not an indication of declining U.S. competitiveness. In fact, these statistics reveal that the average American manufacturer is over three times more productive today than they were in 1975 – a sure sign of economic progress.

The true cause of dwindling American competitiveness is a tax code that puts domestic firms at a clear disadvantage – not a lack of skill or innovation on the part of the American worker. (Chart after the jump).

January 26, 2011

Principles Opposed to Slavery and Statism

Justin Katz

Once again, I find I must recommend an inaccessible article in National Review, this one by Gettysburg College history professor Allen Guelzo:

The antidote to slavery, Lincoln insisted, was also economic free labor. In the 19th century, free labor was the shorthand term for a particular way of viewing capitalism: as a labor system, in which employers and employees struck bargains for production and wages without restriction and where the boundaries between these two roles were fluid enough that today's employee could, by dint of energy, talent, and foresight, become the employer of tomorrow.

Slavery was the polar opposite fo free labor. With very rare exceptions, it denied the slave any future but that of being a slave, and it replaced the open-ended arrangements of employees and employers with a rigidly dictatorial system. The harmful effects extended beyond the slaves themselves, Lincoln wrote, because in the process, all labor became stigmatized as "slave work"; the social ideal became "the gentleman of leisure who was above and scorned work," rather than "men who are industrious, and sober, and honest in the pursuit of their own interests." Men who are industrious  that, of course, described Lincoln. Slavery, then, was not merely an abstraction; it was the enemy of every ambition Lincoln had ever felt.

Especially interesting are the links that Guelzo implicitly draws between the social system built on American slavery and a social system built on statism. For one thing, both characterize a relationship of freely exchanged employment as its opposite:

Lincoln was aware that pro-slavery propagandists had begun claiming in the 1850s that laborers in northern factories were, in reality, no more free to make wage bargains than slaves on southern plantations. In fact, they claimed, "free labor" was worse off, because employers had no obligation to provide health care for mere wage-earners or to support them in childhood and old age, the way slaveowners did for their slaves.

Not for no reason, then, did the Confederate government organize itself in line with the principles of its guiding institution:

... while the Union government contracted out its wartime needs to the private sector, the Confederate government set up government-owned supply facilities...

Historian Raimondo Luraghi called it "quasi-socialist management."

Despite the links between slavery and statism, two considerations have to taken into the balance, one qualifying the case of the former, the other the case of the latter. First, the slave-based system, here, is specifically that of the mid-to-late 1800s  the last guard, as it were, striving to maintain the system. In prior eras, slavery was simply a fact of life coexisting, however discordantly, with evolving notions of liberty.

Second, statists often begin with the well-being of the lower classes primary in their minds. In that respect, their views are opposite those of slaveholders. What unites them is the notion that the great majority of human beings are better off letting experts with centralized authority govern their lives. No matter the impetus, that sounds like slavery to me, no matter how beneficent.

January 24, 2011

Stagnant Life for the Up-and-Comers

Justin Katz

"It is truly a Great Depression for young adults," said Andrew Sum, an economics professor and the director of the Center for Labor Market Studies at Northeastern University in Boston. "Young adults are working at lower rates than they ever worked before since World War II. As a result, you would expect migration to fall because they have nowhere to go to."

That's the conclusion drawn from Census data suggesting that younger workers are staying put despite local unemployment, seeing no opportunity elsewhere. One wonders how this will affect the behavior of the generation of Americans who've just reached adulthood.

The lack of such opportunities as often propel new graduates toward productive lives chasing the American dream is surely a factor. But then again, the expectation of living in a childhood home (on the parents' healthcare into one's mid-twenties) seems to have increased anyway, as have the gadgets of a sedentary lifestyle.

An optimist might observe that an increase in reluctance to move will force wages up in areas in which labor's in short supply, while an decrease in the desire to work will do the same throughout the society. At some point, though, the cost has to become prohibitive, except for those who can move their operations to countries without the excess wealth to support sloth.

An adjustment of priorities could be a very healthy thing in our consumerist society, but (especially if the urge toward consumerism is not adjusted) it could also create a nation of dependents in search of support.

Advice for the Young Regulator

Justin Katz

Kevin Williamson churns out the economic heresies when he defines "social value" as "the stuff society actually values" and "profits" as "evidence of the creation of social value." Much of modern discourse is a debate over semantics, but choose the words as you wish, the underlying economic principles remain the same, and Williamson is entirely correct to explain the perversity of heavy government regulation as follows (addressed as if to the newly appointed regulator):

You can see the problem: You want to regulate because you do not trust competition among firms to serve the public interest. But regulation becomes just one more arena for . . . competition among firms. Round and round we go: Instead of competing to sell people the tastiest hamburgers at the lowest price, or competing to hire the most productive Teutonically efficient burger-slingers at the most efficient wage, companies compete in the field of regulatory-compliance efficiency, which does not shovel any greasy social value into anybody’s ravening public-interest maw at all. The weird thing is that the more you regulate, the more McDonald's will discover that its most important profit-controlling variables are only tangentially related to selling people hamburgers. The clown finds out that Jack in the Box got himself a waiver from Obamacare, and now he wants one for the Hamburglar and Grimace, and we're right back to the original competition among firms that you didn't trust in the first place, but with a perverse twist: Instead of competing to provide social value in the marketplace, firms compete to wring profit out of politics.

And that, if we extend Williamson's logic outward, introduces competition among politicians to make promises to powerful parties, so that they can define social value in such a way that the firms will support their campaigns and arrange for special deals and lucrative gigs when the political career runs its course, not only for the politicians, but also for the regulators and the people whom they hire to come up with the rules.

So, the rules pile up, creating unnecessary, unproductive jobs navigating them, drawing profits and wages away from people who create things that society actually values, rather than people whose main occupation is trying to convince others that they're acting in the interest of "social value." Moreover, the rules become a minefield limiting the ability of new firms to arise and compete with the big boys, who therefore can get away with much more of the objectionable activity (devaluing labor and the rights of the community) that much regulation is broadly meant to curb.

But here's the thing: Betamax and the Arch Deluxe and Clairol's Touch of Yogurt Shampoo (seriously, that existed) just get yanked off the shelves when hordes of people don't buy them, and the great big milling laboratory of the marketplace tells Joe Businessman, who is really a research scientist seeking social value, to shelve that particular hypothesis and maybe not expect a bonus this year. But there's no feedback mechanism like that in government, which means that when you do stupid, you do immortally stupid. You might find yourself asking why Alabama has a law against having an ice-cream cone in your back pocket at any time or chaining your alligator to a fire hydrant. (What was the precipitating episode there, Bubba?) You get Americans in the 21st century still paying the temporary emergency telephone tax to fund the SpanishAmerican War (189798). On and on it goes. Forever. Deathless stupidity tends to accrete and clog up the system, over time, and Washington is a factory whose workers produce deathless stupidity like it's their job, like they're getting paid for it. Because it is. Because they are.

January 21, 2011

Some Hot Air in the Green Economy

Speaking of the suspicious structure of the "new economy"... the economics of wind have come under some scrutiny, lately. Specifically, the project being questioned is Portsmouth's windmill:

Because the setup was considered net metering under state law, National Grid never negotiated a power purchase agreement with Portsmouth. An agreement would have been reviewed by the PUC, which could have rejected the selling price.

Instead, state law required National Grid to buy the power at a prescribed rate that is higher than what the utility pays for power from other sources, such as natural gas-fired power plants.

Portsmouth sells its power to National Grid at the exact price the utility charges the town and other customers in the same rate class. It’s a retail rate, not a wholesale rate. The bundled price includes the actual cost of energy, along with other charges for distribution, transmission and transition. ...

That left the town a net income for the period of $257,075  money it could use to pay its energy bills or any other line item in the municipal budget.

In other words, the state government forced the energy company to pay extra money for Portsmouth's wind energy, which it will pass on to other clients, thus shifting money from the private sector into the Portsmouth government's coffers. One suspects that much of the emphasis on "green technology"  especially that emphasis coming from the public sector  is built around similar schemes.

January 6, 2011

Affecting What We Can

Justin Katz

In a November article for National Review (yes, I'm a bit behind), Keith Hennessey offers ten methods by which elected officials can begin "moving incrementally in the right direction" when it comes to the economy. Most of the items deal with particular issues and ought to be considered, but his #2 speaks to a general approach to governance and ought to be elevated above the rest:

Two.Set the right goal: creating the conditions for growth rather than trying to create growth. Policymakers need to get the policies right and let business leaders decide how to run their firms. Corporate leaders are sitting on unprecedented piles of cash, waiting to see what Washington will foul up next. Take Washington out of their decision-making by creating a stable, predictable, low-cost business environment. They will then decide how best to hire, invest, and expand. Your job as an elected official is not to create economic growth or jobs, it is to create the conditions under which the private sector creates growth and jobs. Stick to your lane and let business leaders stick to theirs.

It is accurate as both a slight and a neutral statement of fact to say that legislators and government executives are not qualified to direct industry and the economy. Actually, nobody is, on a macro scale, but politicians are especially unqualified, and moreover, it is dangerous simultaneously to insert powers of specific economic development into the same hands that hold powers of policing and taxation.

The line between setting conditions and dictating mandates can be gray, in spots, but it's the principle that matters: Let the people investing their reputations and livelihoods on particular endeavors determine the best methods, and make it easier for them to move forward.

January 5, 2011

When Government Is Empowered to Balance Fish and Farmers

Justin Katz

The most stark example yet in the United States  thus far, still shy of mass starvation under Communist regimes  of the danger of letting the legislative brush slop regulations on too many areas of human activities has to be the destruction of California's Central Valley:

Why has California become the epicenter of unemployment? While Michigan and Florida have a mix of problems, including (in Michigan's case) a history of bad management decisions on labor contracts, California's Central Valley woes are entirely a government creation. As I wrote yesterday, the decision by a federal judge to cut off water supplies to an area that literally fed the world turned the Central Valley from an agricultural export powerhouse to a center of starvation within two years. Congress has refused to act to reverse this decision, and as a result, almost a quarter of the families in the area now need government assistance to feed themselves while living on some of the most productive land in the world.

The background is that the 1973 Endangered Species Act has worked its way to protection of the delta smelt, a species of inedible bait fish that is argued to be affected by the pumps that supply the Western portion of the valley with water, so the water has been cut off, leaving irrigation at 25% of its previous flow.

As we'll surely be hearing throughout the year, the Environmental Protection Agency is currently on course to enact similarly detrimental regulations by bureaucratic fiat, treating carbon dioxide as a pollutant covered under the Clean Air Act of 1970.

December 28, 2010

Let Imbalances Correct Themselves

Justin Katz

One hears in this op-ed by David Mabe the thinking behind centralization's inevitable failure over time:

Even in these times of high unemployment, forecasts of labor shortages are becoming more prevalent. New England has long boasted a highly educated population relative to other parts of the country, but the retirement of Baby Boomers and net loss from population migration suggest that the demand for skilled workers will increasingly outpace the supply. These and other looming demographic shifts threaten to hamper regional recovery efforts. ...

Universities, and especially community colleges, according to Modestino, should focus on degree-completion initiatives, increased financial assistance for students, and greater opportunity for career training and professional collaboration to fill looming workforce gaps; such areas of focus would produce a "win-win-win" for employers, for the regional economy, and for the students themselves.

Where the "win-win-win" inevitably falls apart is a mismatch of incentives. When the mandate comes from the government to "do something," taxpayers end up funding the sorts of education that young students prefer (light and easy to pass) and the courses that educators, on the whole, prefer to offer (subjective and difficult to quantify). The result is another cost layered into the economy with inadequate translation into economically productive jobs.

Let private industry work independently with educational institutions to finance the aid and courses that they specifically need, then let students choose those subsidized paths... or not. "Degree-completion initiatives" will move students toward that piece of paper, but not necessarily toward the skills that they actually need.

December 23, 2010

Policy Stasis as Economic Boost

Justin Katz

I think John Kostrzewa overstates the ability of the recent tax-cut preservation legislation to boost the economy:

... I give [President Obama] credit for crafting the compromise with the Republicans because the major pieces of the bill will create an economic stimulus that will stir job creation. It is not the same type of $800-billion stimulus approved last year that funneled taxpayers’ money into the hands of government bureaucrats who spent it inefficiently.

Rather, most of the money this time will go directly to taxpayers who will spend it on basic needs to run their households. Because two-thirds of economic activity in the U.S. economy is based on consumer spending, the money people will get to keep, rather than pay in taxes, will boost their confidence and spur growth.

The tax-cut legislation didn't really add anything to economic policy; it just prevented a massive shift in an unhealthy direction. That it's been passed will surely steady the markets' anxiety, but that just brings the needle back to zero from the red side of the dial, where it hovered only because the president and Democrats were threatening negative change.

The most significant addition to policy, that I've seen, is the Social Security payroll tax cut, which I'll certainly welcome in the short-term, but which only decreases my expectation of ever benefiting from the program in years to come. Of course, that skepticism is also the status quo; Americans of my generation and younger more accurately see Social Security and MediCare as taxes than as investments.

December 16, 2010

Tabulating Rhode Island's FY2011 Federal Earmarks

Marc Comtois

For those interested, HERE is a working list of all of the earmarks contained in the lame duckFY2011 budget. I assume it will be continually updated as required (hence, the "working"). I've also broken out the RI earmarks from messr's Reed, Whitehouse, Langevin and Kennedy and you can download it HERE.

All told, according to the latest info, RI's Congressional delegation has requested $53,625,000, broken down as follows:

* Approximately $41.4 million tabbed for Department of Defense projects
* $2.65 million is tabbed for EPA--particularly wastewater improvement projects--and Parks Service projects
* $2.5 million for economic development projects (broadly defined) with money going to the John H. Chafee Center for International Business, Rhode Island School of Design and URI
* Approximately $7.12 million is going to various projects under the Dep't of Labor, HHS, & Education.

December 15, 2010

Speaking of Being Rich...

Justin Katz

Did you happen to see this profile of the $250,000 family, in the Washington Post, no less?

Just how flush is a family of four with a $250,000 income? ...

The bottom line: Living in high-tax areas on either coast can leave our $250,000-a-year-family with little margin. Even with an additional $3,000 in investment income, they end up in the red - after taxes, saving for retirement and their children's education and a middle-of-the-road cost of living - in seven of the eight communities in the analysis.

Taxes already take a huge chunk from such households (as from all households on the independent side of the line between beneficiaries and payers), and I'm naturally inclined to rail against that fact. Still, we should be clear about the import of these findings.

The first thing to note is that some percentage of the above-$250,000 group are actually small business owners who process their companies' finances through their own tax filings. They aren't actually living on that amount of money.

Beyond that group, though, rich families live relatively well. They've less stress about paying for education; they've larger homes; they've services to help maintain those homes; they'll actually get to retire; and so on. In short, they're "in the red" only in the sense that they aren't amassing an unused sum of money.

The point, with respect to increased taxes in this income bracket, is that they won't jar loose unproductive resources. Rather, they will require such families to transfer money away from other expenses. Investments in long-term projects (materials, employees, and equipment, for business owners) will be one of the first things to go. Charity will likely lead the list. Consumer goods  the purchase of which creates a long line of jobs  will likely take a larger hit than retirement investment and college saving. Perhaps they'll downgrade their homes and cars, decreasing not only their spending, but also the amount of taxes that governments of various tiers are able to collect.

Nobody should pretend that the richest 2% are living lives of like toil to those of use closer to the median income, but in certain regions of the country, most of them aren't sitting on untapped mounds of cash.

December 3, 2010

Land and Money

Justin Katz

Last month, Marc noted that the Providence Journal editors' article pointing out that some relatively conservative states lead the nation in per-capita stimulus funding conveniently sliced the data. As Marc showed, the top 10 states by dollar amount were not all that surprising. As he also showed, funding per square mile shifted the list to mainly blue (and small) states.

A recent letter to the editor by Ernie Rabideau, of Bristol, makes the same point from another direction:

Note that five of the top seven by low population match five of the top seven by stimulus funding per capita, including all of the top four. If you further consider states with the lowest population densities, six of the top seven are matches with the top funding recipients per capita. This is because an equivalent bridge, road or utility system in Alaska or Montana costs more per capita than one in say, California, because of its cost being divided by a much lower number of people.

As an extreme example, a construction expenditure in Wyoming actually costs over 68 times more per capita than the same one in California. Sure, fewer people may need fewer roads and bridges, but roads in big sparsely populated states must be longer to connect population centers, and basic construction costs in cold and/or mountainous locations are generally higher than in warm flat ones. I suppose if we want to balance per- capita spending by state, we don’t have to connect the cities and towns in the rural west, or Vermont, with safe roads and bridges; but there are many benefits to our entire country when we do.

November 29, 2010

When the Competition Catches Up, Despite Itself

Justin Katz

Megan McArdle makes some interesting points about China's potential for economic growth that may quickly find it more susceptible to competition:

The endless acquisition of US currency is unsustainable. The sterilization transactions required to keep their foreign exchange operations from turning into inflation have left the banking system positively gorged with low-interest government bonds; and now that the sterilization has eased, the inflation is showing up anyway. The current official figures are 4.25%, and a bank economist we spoke to yesterday expects something over 5% in the near future.

The wages, too, are starting to rise. Anecdotally, we're hearing reports of labor costs jumping 15-30% in major urban areas like Beijing and Shanghai. Importing low-wage workers from distant farms and using the labor cost advantage to dramatically undercut competitors is a strategy that has limits.

Both those who essentially believe in central planning and those who do not have a tendency to see its initial appearance of success (the lure) as perpetual. The laws of economics still apply, and it still spells disaster to subvert them for too long.

November 26, 2010

A Race Best Not Entered

Justin Katz

An article about Massachusetts' race for a wind energy boom conveys the folly of Rhode Island's own quest:

Massachusetts could soon be home to the nation's first offshore wind farm -- and state officials are hoping to use the Cape Wind project to help fuel a small but burgeoning local wind-power energy boom.

There are already more than a half-dozen companies staking out their claim to the state's wind energy landscape, from designing better turbine blades to marketing high-tech machines that can measure wind speeds and directions from the ground.

And when the nation's largest wind blade testing facility opens early next year on Boston's waterfront, officials are hoping to draw even more business.

One gets the sense that Rhode Island officials believe that being the first state to enter fully into the industry grants rights to house its hub. It's not going to work like that. There's no wall at the border that prevents companies serving the Rhode Island wind market from setting up shop in Massachusetts... or vice versa. Indeed, companies will likely wish to serve both from the same location.

The real determining factor is not going to be which state was first in the water with an offshore farm, but which state presents a better environment in which companies can begin operations and thrive. That should be our state's focus, and it doesn't require special deals for particular organizations in a narrow industry.

Still, he finds the tax bill he received in September a mysterious piece of work. It seems to create something out of nothing.

The tax bill on his truck from the Town of Hopkinton is $96. It is not a bill that will mean major cutbacks on Dutch Hill Road. But it is a bill strangely out of sync with previous bills.

Last year, the tax bill on his old truck was zero, nothing, nada.

"Where does that value come from?" he asks.

Ah, there's the question. A truck gets a year older, a little more settled on its front end, and yet its official value goes up.

There are two culprits, here. The first is the cessation of the state's reimbursement of towns for the taxes that they would otherwise charge on the first $6,000 of a vehicle's value. The remedy for that problem, it seems to me, is for the David Shepherds of Rhode Island to involve themselves with local government and rearrange the circumstances that lead the town to require the money. Pushing those tax dollars through the State House only obscures the financial pictures.

The second is the increased value of used cars. Kerr quotes a woman from the Hopkinton tax assessors office opining that "a lot of people aren't buying new cars, so the second-hand ones become more valuable." What this misses is that Kerr-idol President Obama and the Congressional Democrats created a program that gave people incentive to bring in older vehicles and buy newer ones and that required those older vehicles to be destroyed. That reduced the supply of old vehicles (for parts as well as in whole), and increased the value of those that had not been traded in.

November 22, 2010

Creating Pants on Fire Out of Truth

Justin Katz

Sunday's PolitiFact correctly rates as "true" RI Democrat Senator Sheldon Whitehouse's statement that "the law... permits companies that close down American factories... to take a tax deduction for the costs associated with moving the jobs to China or India or wherever." But in its headline, in its presentation, and in an expanded quotation from Whitehouse, the article restates the argument in such a way as to drift into "pants on fire" territory.

The headline in the print edition of the Providence Journal is "Businesses do get tax incentive for 'offshoring.'" Reporter Eugene Emery rephrases the question as whether "the U.S. tax code actually offer[s] an incentive for firms to engage in such 'offshoring.'" And an expanded quotation shows Whitehouse stating that "loopholes in the tax code... reward American companies for moving American jobs overseas."

One needn't enter the debate about whether and what the United States should do about the loss of jobs to lower-cost workers in other countries to note that the rephrasing of the question is significantly deceptive. As the initial quotation states, businesses can deduct "for the costs associated with moving," but:

Robert E. Scott, senior international economist with the Economic Policy Institute, a liberal-leaning think tank that deals with issues of concern to low- and middle-income workers, confirmed that relocation expenses are deductible and that existing tax law makes no distinction between whether a company moves part of its operations to another state or to another country.

In other words, the code doesn't create an incentive to move, it just doesn't create a disincentive to do so. That's a very different dynamic. Were the U.S. government actively encouraging companies to leave our shores, the public reaction would rightly be greater than if tax law merely allows the usual adjustment for revenue spent on business-related activities.

The incentive to offshore is actually that labor is much less expensive overseas, and that merits a different response than pursuing a species of protectionist policy. I'd suggest endeavoring to increase the rights and expectations of those foreign workers and encouraging Americans toward more profitable careers.

Trust and Confidence in Manufacturing

Justin Katz

Accurately or not, windsurfing  an activity that I tried during summer camp once, some twenty years ago, on a windless lake  comes to mind as a metaphor when trust is needed. Sometimes, you just have to lean back and trust that the wind is there to hold you up and move you forward. That, at least, is the advice that I vaguely recall from the failed expedition, and it comes to mind upon reading this paragraph from Kevin Williamson's recent article arguing that the United States has been unduly worried about China:

Despite all the new competition, the United States remains a manufacturing powerhouse  in fact, the total value of manufacturing output in the United States today is far, far higher than it was in the 1950s. Measured by revenue, profit, or return on investment, U.S. manufacturing is unparalleled, and our factories' output is more than twice China's. But it is true that many manufacturing jobs have been "lost." They were lost not because U.S. manufacturing can't compete with that of feckless Third World rivals, but because U.S. manufacturing is, to use the technical economics term, awesome. The real productivity of U.S. businesses overall grew at an average rate of 1.5 percent a year from 1973 to 1995, which is a really robust number. But the productivity of U.S. manufacturing businesses grew by 2.5 percent in those same years, which is enormous. As Martin Wolf puts it in Why Globalization Works, that growth in productivity alone would have reduced significantly the number of manufacturing jobs in the United States. Add in the fact that people in affluent societies spend relatively less of their disposable income on manufactured goods and relatively more on services, and that reduction becomes even more dramatic. And so it was. There is an obvious parallel: In very poor societies, large numbers of people are employed in agriculture, and people spend most of their money on food. As they get richer, relatively few work in agriculture, and they spend proportionally little on food. Manufacturing, as Wolf sees it, is the new agriculture. In historical terms, it was not that long ago that 75 percent of the U.S. work force was engaged in farming. Now it’s less than 1 percent. But who laments the loss of good farming jobs? (Mostly people who have never worked on a farm, that’s who.)

Increased productivity collects greater wealth, and (in theory, at least) the more-efficient economy will create new and better paying occupations to replace those lost. The fear arises in the inability to predict what those occupations will be. And the alternative is to promote economic inefficiency by holding too tightly onto obsolete jobs, which leads toward the inevitable flaw that Williamson sees in China's economy (emphasis added):

... One of the benefits of running a jackbooted totalitarian regime high on nationalism is that you can do things like enforce a substantial rate of saving and a low level of consumption, or conscript large armies of industrial workers out of the agricultural classes. This sort of transformation is hardly unprecedented in the Communist world: It is precisely what the Soviets accomplished in the decades after their revolution, and a lot of American nincompoops thought they were geniuses. Modern China, having the benefit of a highly globalized economy and sophisticated modern finance, did a decidedly better job of its transformation than did the U.S.S.R.  a lot more carrot, a lot less stick, post-Mao anyway  but, for its day, Soviet industrialization was every bit as impressive a show of force  which is precisely what it was and what China's transformation is. For all the rhetoric about liberalization, China remains a hierarchical, centralized, command-and-control economy, one in which the military takes a very strong hand in many industrial enterprises. China is not the future model of capitalism, but the contemporary model of socialism. And like all socialist enterprises, it is hamstrung by the misallocation of economic resources, a fact that is ameliorated, but only in part, by its willingness to incorporate itself into the global economy and avail itself of the benefits of efficient capital markets.

What ought to happen, if the government weren't in the habit of erecting barriers to entry for new companies to compete with old, is for increased productivity to enable price-dropping competition to move up the ladder. When companies streamline, those on the losing end have an opportunity to apply their expertise so as to create alternative brands, which would create incentive for innovation and drive out the excess wealth now collecting at the top of the heap. The market may currently create obscene salaries for CEOs, but automation and the ability to find less expensive labor in a global society ought to enable folks with the same executive competence to offer the same products for a lower cost.

It's a balancing act, to be sure, but I, for one, continue to doubt the ability of central planners to operate the controls, and I expect those with power to find ways to twist well-meaning regulations into protections against competition.

November 17, 2010

Cap Without the Trade

Justin Katz

A blurb in a recent edition of National Review's The Week offers a necessary reminder of an issue that shouldn't slip out of public view:

Having seized for itself, with the help of the courts, the authority to regulate greenhouse gases without the consent of Congress, the Environmental Protection Agency under Obama has aggressively proceeded to do so. There shall be a 20 percent reduction in emissions from heavy trucks and buses by 2018, the agency decreed -- this following similar declarations regarding cars and light trucks. The idea of setting up a cap-and-trade system of emissions permits has lost favor in Congress, partly because a major scientific scandal diminished the credibility of cap-and-trade advocates, and partly because making energy more costly in a weak economy is politically as well as economically crazy. But the administration has proven that it is determined to unilaterally impose these unpopular caps, and there is little Congress can do to stop it. Unless the opponents of energy restrictions can win a difficult battle against the White House between now and 2012, we're getting cap but no trade.

What's needed is statutory language that takes this sweeping power out of the hands of unelected regulators.

November 16, 2010

Recovery Requires Rethinking

Justin Katz

An excellent article about government economic policy and our current crisis by Reuven Brenner and David Goldman (initially published in First Things) is well worth reading in its entirety. The essay's underlying conclusion is that the focus on this or that manipulation of the economy as an explanation for our current predicament effectively misses the critical point:

The policy debate is a blame game, but one played by blind men with an elephant. Some say that if the Federal Reserve had not kept interest rates so low for so long, there would have been less credit expansion and fewer defaults. Others say that if the Fed had paid more attention to the external value of the dollar than to price indices or GDP, it would have suppressed the developing bubble in home prices. Still others argue that without official support for subprime securitization, the vast subsidies provided by government-sponsored mortgage funders, and the monopoly position of the heavily conflicted rating agencies, the securitized debt bubble might have been contained. Yet others argue that the proprietary trading focus of deposit-taking institutions made the payments system vulnerable to panic.

All these observations are true, and all of them are misleading, for the crisis arose not from any of these errors as such but rather from the Keynesian mindset of policy makers and regulators that prevented them from identifying these problems before they combined to threaten the financial system and the long-term health of the economy.

It's not only a problem of spotting errors; it's also a problem of misconceiving the likely effects of policies:

The collapse of the credit expansion raises the prospect of deflation, and the Keynesian elite now proposes to ward off this danger by returning to the inflationary policy that brought about the crisis in the first place. The International Monetary Fund's chief economist, Olivier Blanchard, offered what he called a "bold innovation" in February 2010, proposing that central banks pursue 4 percent inflation. Evidently Blanchard thinks that people will happily accept a 22 percent reduction in their wages over five years and a 48 percent reduction over ten years. Professional deformation on this scale attests to the triumph of Keynes over common sense. The reasoning of proponents of such policies - Paul Krugman advocates even higher inflation rates - is that the fear of inflation would lead people to spend money before its purchasing power declined. The Keynesians did not stop to ask how Americans could begin a spending spree after the colossal wealth destruction of the past several years, just before the largest retirement wave in American history.

Perhaps it's a matter of a wealthy elite not understanding the decisions and motivations of the masses, or perhaps it's just an inability to intellectualize the relative weight of every likely consequence of policies. The important point is the fundamental misunderstanding of economists' and politicians' ability to manage a global economy. The economy cannot be steered by policy; it's an unwieldy vehicle with many hands on the controls  the hands of every person with resources and talent (i.e., everybody). At best, policymakers can throw large, blunt objects in the path as obstacles and smooth roads that might be taken.

Brenner and Goldman further support my frequent contention that economic advancement must come from somewhere:

As an advocate of emergency measures during the 1930s, Keynes, as we have said, deserves some credit. His legacy in economic theory, though, has been malignant. It is easy to explain why he drew support during the 1930s. It is harder to explain why the Keynesian model, with its inherent tendency to drive off the road, has survived so long.

Part of the answer is that countries devoted to "Keynesian" policies had a run of good luck that covered up the systematic errors of economic policy. And the memory of this run of good luck still beguiles politicians and their advisers, who yet hope that the easy times will come back.

A major source of that good luck was the migration of capital and talent spurred by troubles elsewhere. Until 1989, most of the world suffered under communist or other dictatorial regimes prone to violent political upheaval. Whatever talent and capital was able to escape from the dictatorships arrived on the shores of a handful of Western countries, foremost among them the United States. The export of human and financial capital to the United States and a few other countries helped cover up accumulating mistakes. In politics as in business, competitors survive not because they are clever but because the competition is stupider.

A minor adjustment that I'd make is that the politicians and advisers aren't "beguiled" by past success so much as enthralled by the power that Keynesian policies aggregate to government. It isn't that they are sure the policies will work, in other words, but that they want the policies to work because they benefit by them. The more important point, though, is that economic growth must have a source, and it cannot often be identified from distant capitals or predicted in advance by politicians.

Ultimately, the wisest action for those in power is to create the conditions in which their countrymen can innovate in their own spheres and steer their own economic futures. It's messy and unpredictable, but the only thing predictable about central planning is that it will fail on an increasingly spectacular scale.

November 15, 2010

Unemployment Benefits and Change

Justin Katz

Being unemployed for long periods is a terrible experience for those who lack the resources to survive an extended financial drain. Especially when a family is on the line, the hopelessness and fear of joblessness is one of modern life's greatest anxieties.

Still, at a certain point, unemployment benefits begin to become a weapon of dependency for government agents:

About 30,000 unemployed people are collecting jobless benefits in Rhode Island, where the unemployment rate is 11.5 percent, fifth-highest in the nation.

If certain federal benefit programs expire as scheduled late this month, about 17,000 unemployed Rhode Islanders would run out of benefits sooner than they otherwise would, state figures show.

Short-term help is, I'd argue, a just and reasonable responsibility of state government, and during times of economic stress, the federal government should shift funds from other expenditures to help the states in their efforts. But when nearly two years of government subsidies come to be seen as a humanitarian necessity, the calculation begins to change.

After all, those who are kept afloat by such funds are less likely to make changes that might improve their circumstances while contributing to the economy. That's true on a personal level, with the decreased the likelihood that workforces will move from place to place or industry to industry as the economy requires, or reconfigure their living circumstances toward more sustainable expectations and better fortified family supports. It's also true on a political level, with the ire of unemployed voters focused on maintaining and extending their temporary benefits rather than pressuring politicians to cease their games and get out of the economy's way.

November 12, 2010

Where the Jobs Are

The number of federal workers earning $150,000 or more a year has soared tenfold in the past five years and doubled since President Obama took office...Federal workers earning $150,000 or more make up 3.9% of the workforce, up from 0.4% in 2005....Since 2000, federal pay and benefits have increased 3% annually above inflation compared with 0.8% for private workers, according to the Bureau of Economic Analysis.

Second, Newsweek reveals that 7 of the 10 richest counties in America are suburbs of Washington, D.C.

November 10, 2010

RI Rides on the Stimulus Gravy Train

Marc Comtois

So, the ProJo editors decided to attack "Sarah Palin's Alaska" for "fiscal hyper-hypocrisy". Following the NY Times lead, the ProJo cites data from ProPublica showing that "oil-rich Alaska leads in per-capita federal stimulus money — $3,145." They go on to list the 8 next highest spending/capita states--Montana, Vermont, North Dakota, New Mexico, Wyoming, Idaho, Massachusetts and Washington--and gleefully note that "these are states where 'fiscally conservative' rhetoric attacking the Feds is rife." Well, that's one way of looking at the data.

For starters, here are the overall Top 10 federal stimulus receivers:

By Total $

California

$45,808,855,406

New York

$26,945,643,731

Texas

$24,089,598,247

Florida

$17,013,438,470

Illinois

$14,697,347,883

Pennsylvania

$13,770,009,441

Michigan

$13,434,355,667

Ohio

$13,214,323,963

Massachusetts

$11,036,621,042

North Carolina

$10,189,817,785

No surprise, big states, right?

But the ProJo is trying to be clever and bolster their charge of hypocrisy by focusing on a per capita calculation.

Per Capita

District of Columbia

$7,110

Alaska

$3,304

Vermont

$2,077

South Dakota

$1,952

Montana

$1,831

North Dakota

$1,710

Massachusetts

$1,674

Maine

$1,651

New Mexico

$1,628

Idaho

$1,598

Rhode Island

$1,597

This is the same data from ProPublica cited by the ProJo. I wonder why they left out stimulus money that went to Washington, D.C. in its per capita list? Well, I didn't and I added Rhode Island--which came in 11th--to my list, though the ProJo failed to mention that, too. I guess it didn't really help make their argument or they were so focused on skewering hypocrites they missed what's going on in the community they supposedly serve.

Well, I said to myself, since they get to play with numbers, I want to do the same. A lot of the stimulus money went to infrastructure--roads, bridges and the like--and into the entities that support it. States with big land areas have more of all of that. So I wondered what the spending breakdown per square mile would look like.

Per Sq. Mile

District of Columbia

$62,388,936.64

New Jersey

$1,105,527.98

Rhode Island

$1,088,923.68

Massachusetts

$1,045,672.26

Connecticut

$769,340.15

Maryland

$564,170.16

Delaware

$557,419.10

New York

$493,907.98

Pennsylvania

$298,988.98

Ohio

$294,798.74

Well, how about that? Pretty much the direct opposite conclusion can be drawn if the data is "shaped" that way. Small, though densely populated, northeastern states comprise half of this top ten. And lookee there, li'l ol' RI is #3...and Alaska (not shown here) is dead last, followed by Wyoming, Montana, the Dakotas and other big states.

All that being said, I guess, given the ProJo editors premise, Rhode Islanders aren't hypocritical because we get a lot of stimulus--whether per capita or per square mile--and we continue to vote for those who brought it in. And can you imagine what our economy would be like without it? I wonder why the ProJo editors didn't point that out...

November 8, 2010

Economic Liberty as Equalizer

Justin Katz

Taking some legislation that President Obama has proposed as his cue, Andrew Biggs makes the case against legislative corrections to the gender pay gap. All such arguments come down to the point that there are legitimate reasons that men, in aggregate, make more money than women, and Biggs gives the underlying reason why that can be expected to be so:

Discrimination is unlikely to drive the gender pay gap because, as economist Gary Becker pointed out a half century ago, when one employer underpays his workers, competing businesses can earn windfall profits by luring them away. If Employer A pays women 77 cents on the dollar, Employer B can hire all Employer A's female workers at 78 cents on the dollar to replace his costlier male workers. This raises Employer B's profits, while Employer A must now pay full freight for employees. The Royal Swedish Academy of Sciences noted, in awarding Becker the 1992 Prize in Economics, that "discrimination thus tends to be economically detrimental not only to those who are discriminated against, but also to those who practice discrimination." As long as there is a critical mass of non-discriminating employersand the growth of female-run businesses in recent decades and changes in social norms among males indicates there isthen employers' profit motives will narrow the pay gap to levels justifiable in terms of productivity. Ironically, while the Left assumes that businesses readily sacrifice worker safety and degrade the environment in search of profits, they nevertheless believe employers forgo profits simply to satisfy a misbegotten desire to discriminate.

Of course, to the sorts of people who advocate for legislation like the Paycheck Fairness Act, to write the phrase "make more money than women" is to concede that there is, in fact, discrimination, because they begin with the belief that there are no legitimate reasons. Even if it means forcing businesses to ignore relevant factors (like skills lost during child rearing), to arbitrarily increase the cost of male workers (by offering, e.g., paternity leave), or attacking the very culture and biology that produces the substantial differences between men and women, zealous foes of perceived discrimination care only to work toward equivalent statistical outcomes (unless it's men who are on the losing end). Whether that coincides with equivalent senses of happiness and fulfillment is another matter.

If, by contrast, one accepts the premise that biological reality and individual preferences create circumstances in which it is reasonable for some pay gap to exist, the question is wholly different: How do we squeeze whatever invidious discrimination there is out? Here, I agree with Biggs that the answer is economic freedom:

Even if some of the pay gap is due to discrimination, therefore, economic liberalization may be the key to reducing it. Because employers that discriminate lose profits relative to non-discriminating competitors, increased competition weeds out discrimination. Several studies have shown that as industries faced increased competition, through either deregulation or international trade, the gender pay gap shrank. And the pay gap is larger in monopoly markets without competition and smaller in start-ups and small businesses that must be productive in order to survive. Women need more markets, more enterprise, and more opportunity, not more regulation and litigation.

Arbitrary discrimination is expensive, so creating barriers to entry through government regulations only creates the circumstances in which existing businesses have the competitive space to play silly personal games.

Reflections on the nature of free markets, different ways of being pro-business, liberty and the attributes of a healthy democracy

A succinct summary on the two meanings of being pro-business from Don Boudreaux, who writes for the Café Hayek blog and is a professor of economics at George Mason University:

There are two ways for a government to be ‘pro-business.’ The first way is to avoid interfering in capitalist acts among consenting adults – that is, to keep taxes low, regulations few, and subsidies non-existent. This ‘pro-business’ stance promotes widespread prosperity because in reality it isn’t so much pro-business as it is pro-consumer. When this way is pursued, businesses are rewarded for pleasing consumers, and only for pleasing consumers.

The second, and very different, way for government to be pro-business is to bestow favors and privileges on politically connected firms. These favors and privileges, such as tariffs and export subsidies, invariably oblige consumers to pay more – either directly in the form of higher prices, or indirectly in the form of higher taxes – for goods and services. This way of being pro-business reduces the nation’s prosperity by relieving businesses of the need to satisfy consumers. When this second way is pursued, businesses are rewarded for pleasing politicians. Competition for consumers’ dollars is replaced by competition for political favors.

There is much talk today about the polarization in America and how different factions should compromise by acting in a bipartisan fashion. But such talk is absurd because it ignores several critical and unavoidable issues:

First, policy differences are often based on competing world views. Those differences cannot be wished away by superficial talk about bipartisanship. For example, if you believe in the first definition of being pro-business, i.e., that only the private sector can actually create jobs and the government’s proper role is to promote economic liberty by incenting the private sector to do so, then no size of any stimulus bill will be acceptable. Nor is there any middle ground if you believe that Obamacare represents the socialization of medicine and you don’t believe in socialism. These positions are not about being the "party of no." Instead, they are a clarion call for an alternative public debate about statism, about whether we aspire to become like a European welfare state. Then, instead of ramming down a statist solution to the healthcare issue onto America, we could agree that the status quo for the delivery of medical care isn’t good enough and use that as an alternative starting point from which to conduct a legitimate public debate about different solutions. Polarization will only genuinely dissipate after there is sufficiently open and reasoned public debate about such principles and the desired endpoints of policies that derive from them so that a consensus can begin to form across America.

Second, both political parties have inhibited such a debate. Public choice theory teaches us that we should not be surprised that the parties are focused primarily on promoting their own self-preservation, by sustaining power for the sake of power instead of promoting reasoned debates about how a belief in the ordered liberty of our American Founding should impact our public policies. Such is the added price we pay for having given up on limited government. But, if we believe in liberty, then the people in America have to stand up and insist on the debates. Which is why the Tea Party is perceived to be such a threat to both parties' establishment figures. That debate will take time and will appear messy along the way. But only an arrogant, self-absorbed narcissist will underestimate (more here and here) the American people's ability to instinctively figure things out. Just like the American people rejected the Republicans in 2006 and 2008, the 2010 election was a repudiation of the arrogance of a Democratic party that refused to listen to the American people in recent times. Political gridlock is nothing more than the American people telling the government to stop in its tracks until the the debates can be held.

If the debates are inhibited by the political class, then there will be more repudiations in the coming elections:

...This isn't a wave, it's a tidal shift—and we've seen it coming for a long time. Remarkably, there have been plenty of warning signs over the past two years, but Democratic leaders ignored them. At least the captain of the Titanic tried to miss the iceberg. Congressional Democrats aimed right for it...

But none of this means that Republicans are winning. The reality is that voters in 2010 are doing the same thing they did in 2006 and 2008: They are voting against the party in power.

This is the continuation of a trend that began nearly 20 years ago. In 1992, Bill Clinton was elected president and his party had control of Congress. Before he left office, his party lost control. Then, in 2000, George W. Bush came to power, and his party controlled Congress. But like Mr. Clinton before him, Mr. Bush saw his party lose control.

That's never happened before in back-to-back administrations. The Obama administration appears poised to make it three in a row. This reflects a fundamental rejection of both political parties.

More precisely, it is a rejection of a bipartisan political elite that's lost touch with the people they are supposed to serve. Based on our polling, 51% now see Democrats as the party of big government and nearly as many see Republicans as the party of big business. That leaves no party left to represent the American people.

Voters today want hope and change every bit as much as in 2008. But most have come to recognize that if we have to rely on politicians for the change, there is no hope. At the same time, Americans instinctively understand that if we can unleash the collective wisdom and entrepreneurial spirit of the American people, there are no limits to what we can accomplish...

Elected politicians also should leave their ideological baggage behind because voters don't want to be governed from the left, the right, or even the center. They want someone in Washington who understands that the American people want to govern themselves.

William Voegli offered this sage advice several years ago: “A healthy democracy does not require blurring political differences. But it must find a way to express those differences forcefully without anathematizing people who hold different views.”

The sections titled Issues #1, 2 and 4 in this lengthy May 2010 blog post highlight some of the underlying core beliefs that animate a world view which believes in free markets and liberty. These are the meaty topics worthy of public discussion.

A more intense level of public debate has begun across America in recent months. Here's to it continuing in a vigorous manner until a meaningful new consensus can form in the country.

November 5, 2010

Forward Our Republic Driving

Justin Katz

Back when I was a teenager and thought vehicles an important means of branding, I was a GM guy, especially Pontiacs. Somehow, my group of friends seemed inclined to believe the hostile interpretation of Ford as an acronym for "Fix or Repair Daily." Since its government bailout, however, I've sworn off GM, despite the money toward a new car still lingering as an earned benefit on my GM Card.

For that reason, was thrilled to come across these two stories on the same day, not long ago. The un-bailed-out Ford is doing relatively well:

Ford is on a roll.

Its popular new cars and trucks are grabbing a bigger share of the U.S. market. It's about to erase a big chunk of its health care debt. And it's adding a significant number of jobs for the first time in five years.

On Tuesday, the automaker said it made $1.7 billion from July through September, a jump of nearly 70 percent from a year earlier and its sixth consecutive quarter in the black.

The most problem-free cars and trucks are made by Honda and Toyota, but Ford is closing in fast and General Motors is making big quality improvements, according to Consumer Reports magazine's 2010 reliability rankings.

The first paragraph lumps the American companies together, but there's a substantial difference of degree. Ford is the number 10 make, while GM's highest is Chevy, at 17. Indeed, Ford has "several individual models that were better quality than Toyotas."

October 20, 2010

Still Making Stuff

Justin Katz

Kevin Williamson thinks that President Obama's proposed infrastructure bank is essentially the White House's play to get in on the corrupt Congressional practice of earmarking (subscription required). The article's worth a read, but this tangential paragraph is what caught my eye:

Even though the extraordinarily productive service sectors of the U.S. economy create a lot of output that can be delivered by e-mail rather than by truck or train, manufacturing remains the second-largest single sector, trailing only wholesale trade. In fact, the idea that the United States has entered a "post-industrial" phase is largely a myth. Measured by output, the U.S. economy is much more industrial-looking than Washington's scary bedtime stories about McJobs and outsourcing would suggest: After wholesaling and manufacturing, the biggest sectors are indeed those service-oriented industries  retailing, finance, and health care  but these are followed by a massive construction industry that is nearly as large as the health-care sector. In terms of economic output, the warehousing and transportation of goods bigger than the software industry or the accommodations and food-services industry  to take the two poles of the services economy  and several times the size of the education sector. U.S. factories, as Cato Institute scholar Daniel Ikenson has reported, produce 21.4 percent of the world's manufacturing value added, 60 percent more than China's (without a billion semi-indentured workers earning Third World wages or a for-profit police state  take that, Tom Friedman!). We're making a lot of stuff and moving it around.

Take that as a reminder that the United States still has a foundation on which to build... and much still to lose.

October 12, 2010

A Foreign Reason to Get Our Own House in Order

Why would China so brazenly challenge the world's economic powers like this? Because the country's leaders know what our leaders are only beginning to understand  that China would probably win a global trade war.

It's certainly worth reading Eric Weiner's entire essay for the details of his argument, but the point that I draw from his conclusion is that America's indebtedness and creeping cultural dependency have left us with no good governmental cards to play. Extrapolating a way forward, I'd suggest that Americans need to increase their efforts encouraging the Chinese people to push back against the abridgment of their rights and, perhaps more importantly, to begin restructuring our society so that we're less dependent on foreign loans and more apt to produce and to do business with our own countrymen and women.

Which strongly relates, it seems to me, to Peggy Noonan's latest insight into the national mood:

For those who wonder why so many people have come to hate, or let me change it to profoundly dislike, "the elites," especially the political elite, here is one reason: It is because they have armies of accountants to do this work for them. Those in power institute the regulations and rules and then hire people to protect them from the burdens and demands of their legislation. There is no congressman passing tax law who doesn't have staffers in his office taking care of his own financial life and who will not, when he moves down the street into the lobbying firm, have an army of accountants to protect him there.

Washington is now to some degree the focus of the same sort of profound resentment that Hollywood liberals inspired when they really mattered, or seemed really powerful. For decades they made films that were not helpful to our culture or society, that were full of violence and sick imagery. But they often brought their own children up more or less protected from the effects of the culture they created. Private schools, nannies, therapists, tutors. They bought their way out of the cultural mayhem to which they'd contributed. Their children were fine. Yours were on their own.

It all comes down to a desperate need to return the focus of our nation to individual autonomy, which requires, most of all, that more of the necessary restraints on others' behavior be accomplished through cultural means, rather than governmental. Central management and individual liberty are mutually exclusive, in the long run, and since we can't manage our way to a stronger global economic footing, we have to achieve it through our heritage of freedom and personal volition.

October 9, 2010

How Is Debt Going Away... Revisited

Justin Katz

Since I took the time to argue, last month, that the slow pace of paying down debt, as compared with giving banks no choice but to write it off, means that a whole lot of debt has to be paid down to balance out each default. Michelle Singletary would say that I'm being too charitable:

CardHub's analysis found that credit card debt for the second quarter of this year decreased by about $12 billion compared with the previous quarter. But banks charged off $21.8 billion during the same period. Given that the drop in outstanding debt is smaller than the dollar amount that was charged off, the difference of $9.8 billion is the amount of debt consumers accumulated, Papadimitriou said.

His findings give a more realistic view of how seriously the recession has crippled consumers. The charge-offs also indicate that many banks are continuing to experience deep losses, and this is one of the reasons why credit is still tight. It's why many lenders have been cutting people's credit limits, he said.

The Wall Street Journal analysis that I cited in the first link, above, found that some debt was indeed being paid down. The difference between that and CardHub's numbers appears to be that the former is all debt, while the latter is credit card debt. That could mean, in other words, that folks are paying off longer-term debt while still living off of their credit cards.

Whatever the case, Americans still have much work to do breaking their addiction to swiping plastic.

October 8, 2010

Not an Optimistic View

Justin Katz

John Mauldin's report from an economic conference in Texas doesn't leave much room for optimism, with its first point being as follows:

John Hofmeister is the former president of Shell Oil and now CEO of the public-policy group Citizens for Affordable Energy. He paints a very stark (even bleak, as he gets further into the speech) picture of the future of energy production in the US unless we change our current policies. First, because of the aftereffects of the moratorium. It is his belief that the drilling moratorium will effectively still be in place until at least the middle of 2012. There won't even be new rules until the end of 2011, and then the lawsuits start.

Gulf oil production will be down by up to 1 million barrels a day. Imported oil is now 67% of oil usage but will go to 75% by 2012. He thinks crude oil will be up to $125 and gasoline between $4-$5 at the pump. And it will only get worse.

Granted, Hofmeister is an insider, but the central difficulty he describes is a critical one. America's political polarization has made it difficult for the energy industry to advance, amidst regulations that shift regularly, depending who's in power. Moreover, the relentless growth of government has led to 13 energy regulation agencies and 22 congressional committees with a hand in oversight.

Mauldin goes on to review dark prognostications in employment and housing, but an interesting question of political philosophy emerges when the conference turns to questions of China:

Among the societies we describe as democratic capitalist there are vast differences in the bargains and hence in the nature of economic activity. America tolerates levels of instability, crime, inequality and pernicious religious zealotry that Europeans and Japanese consider absurd, but it gets in return a much more dynamic entrepreneurial system of wealth creation. Japanese willingly accept levels of social conformity that Westerners consider bizarre, but achieves a high level of social stability and tremendous success in economic areas (such as high precision manufacturing), where self-disciplined social cohesion is a plus.

China, like all societies, is working out its bargain. It is still very much a work in progress but the process is dynamic, not static.

Mauldin's description of the return for America's bargain is far too limited. Dynamic entrepreneurialism is, after all, a subset of broad freedom and has its variations in other social realms than business  religion, science, art, and on and on. Unfortunately, for some of the same reasons that energy is set to become much more expensive, we're drifting away from our heritage, in that respect.

October 5, 2010

When Government Is All, Political Connections Are Decisive.

Justin Katz

Stephen Spruiell describes the "atypical" way in which the Federal Deposit Insurance Corporation (FDIC) has handled ShoreBank, a Chicago-founded bank with a leftist lending bent. Apparently, "the FDIC relieved ShoreBank of its most toxic assets but left largely intact its management team  a highly unusual move"  and is not requiring an adjustment of its business model. The suspect treatment began in earnest after the Treasury Department said that the bank would have to raise $125 million in private investment to qualify for a TARP bailout:

That was a staggering sum for a bank that, at its zenith, had dared to dream about raising $100 million in a stock offering but was now losing that much money at an annual rate. Not to be underestimated, ShoreBank's network of political patrons, from Illinois Democrats such as Sen. Dick Durbin and Rep. Jan Schakowsky to friends of Bill [Clinton] and buddies of Barack, started suggesting to the biggest players on Wall Street  names like Goldman Sachs, Morgan Stanley, and GE Capital  that they really ought to consider helping ShoreBank. And what do you know? Last May, this who's who of bailout recipients and regulatory targets announced that they couldn't think of a worthier cause. ShoreBank ended up raising nearly $150 million. The banks ponied up most of the money (the Ford and MacArthur Foundations kicked in their share) and placed it in an escrow account, to be invested in ShoreBank upon its receipt of TARP money.

But by then it was too late. The Federal Reserve took another look at ShoreBank's rapidly deteriorating assets and determined that any taxpayer investment in the bank would quickly disappear, never to be paid back. The administration couldn't afford to let the bailout be that explicit, because House Financial Services Committee ranking member Spencer Bachus (R., Ala.) had already fired off a letter demanding to know whether any administration official had played a role in the bank's private-capital raising. That removed TARP from the administration's tool kit, but, having coaxed nearly $150 million out of the private sector, the bank's friends in government found another, less obvious way to save ShoreBank.

The investors created a bank with the different name of Urban Partnership Bank; the FDIC seized ShoreBank and sold it to Urban Partnership at a $368 million loss of its public fund. Moreover, contrary to its rules, the FDIC allowed the cast of characters from the failed bank to take their places in the new bank.

No doubt, many folks believe that ShoreBank's stated mission of giving people on the same degree of concern as profits is a wonderful goal, and worth preserving. But when the model isn't working, red flags should suggest that more people might be harmed than helped. Those flags should all but cover the field when big-government corruption becomes the savior.

It turns out that the belt-tightening interpretation may not have been true in the least. If the data below is correct 99% of the reduction in consumer debt was due not to repayment of loans, but to non-repayment. The debts didn’t go away because they were paid off. They went away because they were written off as hopeless.

I'm not inclined to disagree with Jones that "there's too much debt that will never be repaid"  although, in the name of exactitude, I'd note that the Wall Street Journal's numbers to which he's reacting actually suggest that 96% of the reduction was due to default. However, this evidence alone doesn't prove that habits haven't changed. After all, it's much more difficult to pay down debt than to default and takes a longer time to show results.

If I pay every dollar that I can toward debt reduction, my total goes down a couple of hundred dollars per month. If my creditors were to write off my debt in total, well, it would plummet quite a bit more than that. Indeed, in the balance between the two ways of reducing debt, there would have to be a large number of folks like me to offset even one defaulter.

September 19, 2010

Helping Small Businesses by Making Their Lives Harder

Justin Katz

It's as if, even when they're claiming to be legislating on behalf of small businesses, Obama and the Democrats can't resist binding small businesses:

But under a little-publicized provision in the bill, mom-and-pop owners of triple-deckers, duplexes, condos and other such rental real estate will have to obtain the names, addresses and federal tax identification numbers of many of their snowplow operators, electricians, painters and other such service providers.

If the landlord pays such a contractor a total of at least $600 for the year, the landlord will generally have to issue that contractor a special tax form, called a Form 1099 (or "ten ninety-nine" by tax professionals). The landlord will have to list on the form the amount the contractor was paid for the year, and send a copy of that form to the IRS.

When hiring workers, in this way, businesses are acting as consumers, not as contractors; it's not as if they charge renters a markup on top of handyman bills. But to clueless Democrats (and not a few establishment Republicans, I'm sure), anybody who profits from any activity is a target for taxes or assistance in collecting taxes. It will now be that much more difficult for Americans to start business operations involving rental properties and to hire tradesmen and workers to maintain them.

On the margins, the decision of whether to hire somebody or to do repairs one's self will tip toward the latter. There will also be increased incentive to hire off-the-books tradesmen rather than small operations that are striving to follow the rules. Finally, although the news report explains that the government hopes to recoup $2.5 billion in taxes over the next decade, by this move, it seems not to be questioned what the real cost to affected businesses will be.

The only rational justification for this move, that I can see, is that the government is trying to fund its incompetent stimulus programs by squeezing the private sector so that it doesn't have to shave its own programs. The problem is that even tax-cheating small businesses contribute to the economy, while government is all absorption.

September 10, 2010

Even During Painful Time, the Urge to Redistribute

While tax cuts enhance long-term productivity, expanding the government sector is hardly a recipe for economic vitality. There are surely many useful activities for the government to undertake in a market economy, but a frenzied orgy of stimulus spending is not conducive to rational discussion of what they should be. And of course, there again is the matter of the soaring national debt.

The problem comes with the reasons that Rogoff dislikes the tax-cutting solution. First, he argues against increasing public debt, which should only require that tax cuts be coupled with reductions in government spending.

A second problem with tax cuts is that they might well have only a limited impact on demand in the short run, with the private sector hoarding a significant share of the funds to repair badly over-leveraged balance sheets.

Here, Rogoff merely chooses to ignore human nature. Private sector entities with "over-leveraged balance sheets" will "hoard" until they feel secure, whether tax cuts help them to do so or not. They will also continue to be reluctant to hire and expand businesses, and by continuing to confiscate their resources through taxation, the government will only prolong this healing process. Moreover, Rogoff's central theme is that economic recovery is going to take "many years."

So, given the long-term recovery, why not go with a long-term solution? That's Rogoff's third and most mystifying reason for disliking tax cuts:

By some measures, nearly half of all Americans do not pay any income tax already, so cutting taxes skews an already very unequal income distribution. Deferred maintenance on income equality is one of many imbalances that built up in the U.S. economy during the pre-crisis boom. If allowed to fester, the political consequences could be severe, including trade protectionism and perhaps even social unrest.

Continued high unemployment and economic uncertainty won't cause social unrest? Rogoff should look around. Easing government confiscation from the half of the population that actually pays for it is unfair because the others contribute not at all? That's a truly remarkable sentiment; apparently it is the role of government to take from productive Americans merely for the sake of taking. And what's this about "maintenance of income equality"? I'd prefer maintenance of a bustling economy with plenty of opportunity for those willing to seek it. A moment's thought should lead any reasonable person to the conclusion that it's better to advance though others profit more than to wallow in stagnation.

Because he takes off the table tax cuts that would allow the private sector to repair itself at a more rapid pace, Rogoff winds up suggesting that the Federal Reserve should buy up government bonds and private debt. That means "printing money," which means inflation. I'm not a Harvard economist, by any means, but my understanding is that inflation would make it more difficult to pay off debt, generally. Thus, those who benefit from government handouts and who manage to sell their debt to the Fed would benefit at the expense of those  most likely throughout the broad economic middle  who must continue to pay off the same amount of debt with dollars that are individually less valuable.

Somehow, the question seems to come back to this: Is the redistribution of wealth worth continued all around hardship for everybody who isn't politically connected? It would seem to be one uberclass or another.

September 9, 2010

Once Again, Government Spending Can't Spark Growth

John Kostrzewa mentions, as if it should be a surprise, that temporary tax gimmicks have been as unable to spur the economy as giving away loads of money:

The federal housing tax credit was supposed to be the bridge between a dead real estate market in early 2009 and a recovery this year.

The idea was that an $8,000 credit would stimulate sales and stabilize prices, forming a floor under a housing market that had been sinking for three years.

For awhile, it seemed to be working.

But when it expired last month, and the private housing market was left to stand on its own, another reality hit home  the federal tax credit had become a bridge to nowhere.

Used this way  especially by a government already running deficits  tax credits are little more than government giveaways. Economically speaking, they're good, as far as government giveaways go, because at least they reward some sort of activity, but they're still just a limited drop of resources.

In that, such credits are in keeping with the flawed and failed approach that the Democrats have been taking to stimulating the economy. Essentially, Obama and Co. have been gambling that the private sector would come up with something as government hand outs bridged the economic gap. Back in 2009, I likened the method to adding water to a pond in the hopes that it would overflow its bounds somewhere and expand.

There are two problems with this strategy:

The government, by its nature, must take money from one area of the pond in order to dump it in another.

The areas that it has sought most rapidly to fill  maintaining or expanding money in the public sector and in select, struggling industries like housing, finance, and automobiles  were a problem precisely because they were artificially high.

Kostrzewa cites uncertainty as the root cause of continuing malaise, but that's more of a subsidiary cause. The free market thrives on uncertainty and risk. What makes the current uncertainty insidious is that it is the result of government usurpation of market mechanisms. In other words, it's not that people are uncertain about what will happen in the future  which they always are  but that they're uncertain about the very rules of the economic game under the micromanagement of a capricious government that's easily manipulated by special interests.

At this point, the only way to change that dynamic  barring a surprise breakthrough like another Internet  will be a plausible mea culpa by the federal government for its actions over recent decades, the last two years most of all. New policies should lower taxes permanently and withdraw the government's various fingers from the economy. And the only way for such a turnaround to be plausible will be in conjunction with major turnover in elected offices.

September 6, 2010

Hoping for an Effective Stimulus Without Change

Carroll Andrew Morse

Victor Davis Hanson has an interesting post at National Review's The Corner, on why borrowing more money won't act as a stimulus in the same way that deficit spending during World War II did (he's reacting to a Paul Krugman column based on that premise). Hanson provides lots of macro-level historical detail, but the fundamental premise is that the deficit spending of World War II was paired with some fundamental changes in how the money was spent...

The war years were characterized by frenetic hyperactivity: Americans worked long hours, women were brought into the work force, new towns and manufacturing centers sprang up, and people gave up necessities — all on the assurance that this furious pace and consumer scarcity would be short-lived.

...which differs in both purpose and implementation from current "stimulus" spending, where the primary objective seems to be preserving the status-quo established in the last decade, without any changes having to be experienced.

September 2, 2010

Small Cuts Credited, Huge Windfall Ignored

Despite a recession, record floods and high unemployment, Rhode Island managed at least one achievement this year  a state government budget surplus.

Preliminary figures posted Wednesday show that the state recorded a $17.7-million surplus for the year ended June 30, even though it began that year with a $62.3-million deficit.

The article goes on to meander through elected officials and bureaucrats crowing about the hard work that they've done to trim the budget in difficult times. This part comes almost as an unrelated tidbit toward the end (emphasis added):

The state could use the surplus should there be a budget deficit for the year that ends June 30, 2011, he said.

But if there is a surplus for that year, too, the state could use the money to deal with what is scheduled to be a budget deficit of about $320 million for the year that ends June 30, 2012.

That is when the federal government is scheduled to pull the plug on the extra aid it has been doling out to states to help them get through the recession.

There's something pitiful about state officials' slapping themselves on the back for fiscal-management prowess based on a tentative $17 million surplus when a higher form of government is shoveling hundreds of millions in future-taxpayer money to them through the back door. It's a bit like a glutton's claiming success in his diet because he skipped the sorbet in a ten-course meal.

National Budget Deficit Trends

The CBO breaks that cost down over the eight calendar years of 2003-2010. Below is a picture of federal deficits over those years with and without Iraq War spending.

As Hoven points out, the deficits actually were shrinking until 2007, then started back up in 2008. What happened in between? Democrats took over Congress. Hoven adds some context (we all love context!):

The sum of all the deficits from 2003 through 2010 is $4.73 trillion. Subtract the entire Iraq War cost and you still have a sum of $4.02 trillion.

No one will say that $709 billion is not a lot of money. But first, that was spread over eight years. Secondly, let's put that in some perspective. Below are some figures for those eight years, 2003 through 2010.

August 16, 2010

The Way Out of the Recession

Justin Katz

If an article by the Associated Press's Jeannine Aversa is any indication, the road to economic recovery remains a mystery to mainstream journalists:

The Federal Reserve has little power left to lift the economy out of its rut. Congress, with an election looming, has no appetite for more stimulus. Shoppers are reluctant to spend, and businesses are slow to hire.

Let's face it: There is no easy or imminent fix for the flagging recovery. ...

Americans who are worried about their jobs, not to mention volatility in the stock market, don't want to borrow. They saved 6.2 percent of their disposable income this spring. Before the recession, it was more like 1.2 percent. ...

"It's a pervasive level of uncertainty that people and businesses feel about their economic futures," says Ken Mayland, president of ClearView Economics. "It's frozen them into inactivity."

The state of the economy is, of course, the leading cause of uncertainty, but the efforts of President Obama and his Democrat Congress to  in White House Chief of Staff Rahm Emanuel's phrase  not "let the crisis go to waste" has put it over the top. The solution, therefore, is not more "stimulus" of the sort that we've been seeing, but a clear message from Washington that "our methods have failed, now it's up to you in the private sector."

In concert with a deep change of faces in Congress, Republicans and Democrats should pledge no "transformative" legislation until the economy is humming again. No cap and trade. No pro-union hand-outs. And a repeal of ObamaCare. They should also strive to give taxpayers as much of their money back as possible so that we can save to the level at which we'll feel secure and then begin spending and investing.

Mystery only enters the equation when the objective is to maintain and expand a large, invasive government while persuading the public to behave as only folks confident that the economic rules are stable and that the ruling class will not govern by whim.

August 12, 2010

Government Giveaways... to Itself

Justin Katz

Matt and I discussed the federal government's billion dollar giveaways to states to make up for their poor management and failure to adjust to the economic times, on last night's Matt Allen Show. Stream by clicking here, or download it.

Companies learned during the recession to do more with less, and with uncertainties about consumer spending, the broader economy and government policies, many businesses are holding the line on employment, even as they pour hefty sums into new machinery, equipment and software. ...

Bill Cheney, chief economist at John Hancock Financial in Boston, says that he is still hopeful that hiring will pick up as sales increase and existing workers are pushed to the hilt. But if they don't, he says, companies’ reluctance to hire could end up hurting them and undermining the recovery.

"Profits are great, but all that could change if the job engine continues to sputter," he said. "Business capital spending helps, but consumer spending matters more." And without jobs, he said, people will pull back.

Apart from the politics, it's reasonable to suggest that individuals and organizations have come to the conclusion that they'd gotten in the habit of overextending themselves and are correcting that behavior, and it's a precarious prescription to suggest that they oughtn't be more fiscally responsible. But a case could be made that in propping up the economy with money borrowed from the future  that is, creating demand without the corresponding increase in wealth among consumers  the current government has given companies the wherewithal to step back and invest in productivity improvements that don't create jobs, but rather ensure that they will return less rapidly.

August 10, 2010

The Government's Business Model

Justin Katz

It's quite model the U.S. government has created for itself, as an entity, and the Democrats have made its principles undeniably clear with their ownership of power:

Spending more on border security commands bipartisan support, but the jobs bill, which narrowly passed the Senate, is being described in starkly different political terms. Democrats say it could save the jobs of more than 300,000 teachers, police officers and other public health workers. Republicans see it as more profligate government spending and a pre-election gift to teachers' unions and other public service unions that are crucial to helping keep Democrats in the majority.

The legislation provides $10 billion to school districts to rehire laid-off teachers or ensure that more teachers won't be let go before the new school year begins. The money could keep more than 160,000 teachers, including 16,000 in California and 14,000 in Texas, on the job, advocates say.

The other half of the bill has $16 billion for six more months of increased Medicaid payments to the states. That would free up money for states to meet other budget priorities, including keeping more than 150,000 police officers and other public workers on the payroll. Some three-fifths of states have already factored in the federal money in drawing up their budgets for the current fiscal year.

With all tiers of government unable to operate in ways that maintain their workforces  and reluctant to trim unnecessary labor  the feds are simply borrowing money against the livelihoods of future taxpayers to fill the gap. They're taking money from the private sector to insulate their own employees against the combination of mismanagement and hard economic times. Conveniently, since government employees can vote for their employers, the larger government gets, the greater its directly bought and paid voting bloc becomes.

This is what way-too-big government looks like, and the trend must be reversed.

August 9, 2010

A Flat Pyramid Scheme

Justin Katz

In the course of checking a claim by Congressman Jim Langevin, C. Eugene Emery, Jr., offers this explanation of the calculation behind the "multiplier effect" allowing Democrats to claim, as Langevin did, "for every $1 we spend on unemploymen t benefits, $1.90 is put into our economy":

When you give $1 to people who have lost their jobs and they have run out of savings, those dollars get spent. So Mary gives it to Mike down the street to buy some of his fruits and vegetables. Mike, who relies on customers like Mary, might put 25 cents in the bank but use the rest to buy seed and fertilizer from Tom's store in town. Tom might save a dime of the 75 cents he got from Mike but use the remaining 60 cents for a new pair of glasses.

When economists calculate the gross domestic product, they add up all those transactions (excluding the amount set aside in savings and money that ends up overseas if you buy foreign goods). In this limited example, Mary's $1 has added $2.35 ($1 plus 75 cents plus 60 cents) to the gross domestic product. Yes, it's still just $1, but by passing it along it has helped three people.

For purposes of economic theory, this is an interesting consequence of the definition of the GDP, but in contriving a policy to increase economic activity and employment, it's not so useful. The GDP calculation does not differentiate between a dollar that Mike spends because Mary transferred her government cash to him and a dollar that Mike pulls out of his savings because he thinks investing in his business is a better strategy. To get the economy rolling of its own volition, policies must encourage the latter.

Since a government in deficit has no savings of its own, it must take Mary's dollar from somebody else, whether decreasing some other expenditure, increasing taxes, or borrowing from the future. That means that Mike might reasonably expect the personal profits from his business to decrease, encouraging him to find other things to do with his money than invest in his economic output (savings, foreign transactions, etc.).

Whether we continue to extend unemployment benefits is more a moral question than an economic one. But on the economic side, priority number 1 ought to be encouraging business owners and entrepreneurs to take on the risk that ultimately provides folks like Mary with employment.

July 30, 2010

Issues Big and Small

Justin Katz

I've been preoccupied, today, with the sorts of thoughts that are hugely important to the individual, but quotidian details on a larger scale... and there's been so much on that larger scale that might otherwise have merited consideration. The economy, obviously:

The recovery lost momentum in the spring as growth slowed to a 2.4 percent pace, its most sluggish showing in nearly a year and too weak to drive down unemployment. ...

... the recovery has been losing power for two straight quarters. That raises concerns about whether it will fizzle out. Or worse, tip back into a "double-dip" recession. ...

In the revisions issued Friday, the government estimated that the economy shrank 2.6 percent last year -- the steepest drop since 1946. That's worse than the 2.4 percent decline originally estimated. The economy's plunge underscores why the unemployment rate surged to 10.1 percent in October, a 26-year high.

Businesses appear to have the resources to expand, but it's all about the uncertainty, and uncertainty has been the theme of the current Congress and administration. Thousands of pages of invasive law creating new bureaucracies to impose unwritten regulations. Those with resources, in other words, have reason to hold their breath.

The generally accepted view of the Deepwater Horizon disaster has focused on the blowout preventer and the non-standard procedures BP conducted just before the explosion and fire. However, most of the damage and the main source of the spill came from the collapse and sinking of the DH platform rather than the initial explosion. A new report by the Center for Public Integrity, based on testimony from people on scene and Coast Guard logs, contains evidence that the platform sunk because of a botched response from the Coast Guard, which failed to coordinate firefighting efforts and to get the proper resources to fight the fire.

And the controversy will continue. Of course, now that BP has promised its billions in aid and the investigations into the incident pick up steam, we hear this:

Yes, the spill killed birds  but so far, less than 1% of the number killed by the Exxon Valdez spill in Alaska 21 years ago. Yes, we've heard horror stories about oiled dolphins  but so far, wildlife-response teams have collected only three visibly oiled carcasses of mammals. Yes, the spill prompted harsh restrictions on fishing and shrimping, but so far, the region's fish and shrimp have tested clean, and the restrictions are gradually being lifted. And yes, scientists have warned that the oil could accelerate the destruction of Louisiana's disintegrating coastal marshes  a real slow-motion ecological calamity  but so far, assessment teams have found only about 350 acres of oiled marshes, when Louisiana was already losing about 15,000 acres of wetlands every year.

Sometimes, it's difficult to know what to believe, when the issue isn't right there in front of you. Another argument, I'd suggest, for small, decentralized government.

The Effects of Minimum Wage

Three years after the passage of federal wage legislation, teen employment prospects are suffering tremendously. The unemployment rate for 16 to 19-year-olds remains above 25 percent; for those ages 16 to 17, the unemployment rate is close to 30 percent. While the recession has been a significant cause of teens' employment woes, some advocacy groups have claimed that it's the only cause  downplaying any employment loss caused by the more than 40 percent increase in the federal minimum wage that occurred over the same time period. ...

Using state-specific variations in minimum wage growth, and carefully controlling for the effects of the recession and other state economic differences, Even and Macpherson are able to isolate only the decline in teen employment that was caused by the federal wage hike.

For the 19 states affected by all three stages of the federal wage hike, there was a 6.9 percent decline in employment for teens aged 16 to 19. This translates to approximately 98,000 fewer employed teens. Broadening the analysis to include all 32 states impacted by any stage of the federal wage increase, the authors find approximately 114,400 fewer employed teens.

Of course, teen employment is only one segment of the total entry-level employment pool, but it's surely representative, and it's particularly notable which subsegment is likely to be hardest hit:

When Even and Macpherson look specifically at 16 to 19-year-olds with less than 12 years of education, the proportional employment loss grows larger. In states impacted by all three wage hikes, there was a 12.4 percent decrease in teen employment.

Yes, this subsegment overlaps teens who are presumably still in school, but even so, they're losing valuable experience in the workforce. The ripple effects in the economy are surely substantial, from increased responsibility for higher-level employees, decreased opportunity for employers to expand, and growing attractiveness of immigrant labor.

July 29, 2010

Debt and Taxes  Big Either Way

Brian Riedl likens our growing national debt to the bubble that's left many of us owing more for our houses than they're worth, forcing others into destitution, and holding our economy under water:

In short, between 2009 and 2020, Washington is set to borrow more than three times more than in the previous 220 years combined. How has this been possible? Because Washington, like many homeowners, was lured by temporary low- interest rates. Since 2000, the interest rate on the 10-year Treasury note has fallen from 6 to 3 percent. The U.S. Treasury has lowered its interest costs further by shifting toward cheaper short-term debt. Thus, nearly half of government debt will need to be refinanced in the next 12 months, and nearly two-thirds will require refinancing within 36 months. So even though the national debt has surged since 2000, the annual net interest costs have actually declined from $223 billion to $209 billion. Consequently, some commentators are downplaying the long-term cost of rising debt. In doing so, they display a failure to understand interest-rate trends.

Enter President Obama's Deficit Commission, which appears to be preparing to raise taxes to the tune of $26.7 trillion to make up 25% of the projected shortfall for Social Security and Medicare. At almost twice GDP, that means that even if the government manages to cut other spending enough to make up three-quarters of the problem, the equivalent of our entire economy will have to be siphoned away for two years.

July 27, 2010

Mark Zaccaria: Lobstering Moratorium Another Example of Bad Government Policy

Engaged Citizen

In a climate of increasing regulation from Washington, the Atlantic States Marine Fisheries Commission recently recommended a five year moratorium be placed on lobster fishing all along the Atlantic seaboard. While the decision was fortunately voted down, it still represents a growing trend of dangerous restrictions being placed on individuals and industries by uninformed and misguided regulators.

The recommendation by the Atlantic State Marine Fisheries Commission would have been a death sentence for the RI lobster fishing industry. It would have cost the state countless jobs. Just the idea that a government commission was considering a complete ban on lobstering demonstrates the bureaucrat's disregard for the local economy. There are legitimate concerns about maintaining a healthy population of lobster in our waters and the lobstermen that I know are first among those seeking to do so. A complete ban on harvesting would not have been productive for either the shellfish or RI business.

Since 2008, the federal government has spent more than $1 trillion attempting to artificially "stimulate" the economy. Despite the massive increase in spending unemployment in Rhode Island remains above 12% and the national debt has grown to more than $13 trillion. It's clear that something is not working.

The problem is that the federal government believes that it is more effective at creating jobs than the individual entrepreneur or business owner. The regulations and restrictions being placed on individuals and industries by an ever growing government is killing jobs and bankrupting our economy. Rhode Island's representatives should be encouraging businesses to come to our state, not driving it out with overbearing taxes and regulation.

Mark Zaccaria is candidate for Congress in Rhode Island's Second Congressional District.

July 25, 2010

They'll Find the Money or Change in Ways We Don't Like

Justin Katz

One wonders whether U.S. legislators don't understand the consequences of their work  which isn't implausible, inasmuch as it's a real question whether they read the legislation on which they vote  or don't care. Of course, the conservative critique of government is that big government will tend to work in the interests of those with the incentive to manipulate lawmakers who cannot or will not see pitfalls, leaving the only rational and ethical choice for legislators to be to decline to micromanage the private society that they're supposed to serve.

The point comes to mind, this time, on news following passage of the "sweeping financial overhaul":

Investors are worried about banks' future earning power after Thursday's passage of the most dramatic rewriting of banking rules since the Great Depression. Adding to the pessimism are falling trading profits  which all three banks mentioned in the their earnings reports  and weak U.S. loan demand. ...

Yet banks are already moving to recoup any losses. One approach: making traditionally free services premium offerings. A Bank of America pilot program in Georgia, for instance, charges customers $8.95 a month to get paper statements or use bank tellers. The bank could start the program nationally as soon as next month.

Bank of America is also considering raising minimum balances on some accounts and charging customers who fall below it, Moynihan told analysts during a conference call.

Locking more money in savings accounts is probably not the best outcome for our struggling economy. But more generally, it simply isn't the case that companies  banks or otherwise  sit on large piles of money that they know they don't need and that they are willing to give up at the wave of the president's magic pen, as if they were children refusing to share their candy. That's not to say that businesses don't hoard wealth or don't rationalize self-serving strategies; it's merely to make the obvious point that they'll seek to profit as much as the market will bear, saving as much as they deem wise and distributing their profits as they perceive their internal dynamics to require.

When government operatives pick a particular policy of the banks, such as debt card "swipe" fees, to disallow by fiat, the affected organizations will look elsewhere. They're obviously in a much better position to know what fees can conceivably be imposed, and with industry-wide rules (excepting government debt cards, naturally), they've less to fear from their competition as they impose them.

Perhaps the most chilling paragraph in the article, though, is this:

But banks won't have free rein to raise fees on whatever they choose. The financial overhaul calls for the creation of a new Bureau of Consumer Financial Protection. The agency will have vast powers to enforce regulations covering mortgages, credit cards and other financial products to ensure customers are getting a fair deal.

Unelected bureaucrats, in other words, will now have "vast powers" to make a laboratory of the finance industry for experiments in consequences. At least when private businesses engage in such experimentation, they do so at the risk of their own financial health. When government agencies muck things up, they tend to find themselves with more authority.

And that reality presents a golden opportunity for large incumbent players in the industry who can find ways to take over and influence their regulators in such a way as to ensure that they profit even in calamity.

July 22, 2010

Stimulating Something Other than Lethargy

Justin Katz

Stephen Spruiell argues that there have now been five rounds of stimulus spending by the federal government, totaling $1.085 trillion, which surpasses the cost of both wars in which our nation has been engaged over the last decade. He further argues that the approach that the government has been taking has been flawed in its very principles.

This isn't just a matter of wasted money, because the mounting debt will eventually come due and, moreover, the debt is creating a bubble likely to pop, moving us (at last) to the ultimate "too big too fail" collapse. Not surprisingly, I like his proposal for a reworked stimulus policy:

Keynesian economists also argue that scaling back stimulus spending might actually hasten a debt crisis. Cutting spending during a period of economic weakness, they say, would depress growth, which would depress tax revenues, which would make debt service even more difficult. The reason they are enchanted with this argument is that it never occurs to them to cut spending and tax rates simultaneously. To be clear, I am not claiming that tax-rate cuts would foster enough economic growth to pay for themselves, but there is strong evidence that they would foster more growth than deficit-financed government spending would  evidence that economist N. Greg­ory Mankiw recently summarized in the journal National Affairs. The incentive effects of tax-rate cuts would more than offset whatever harm (my guess is: very little) might accompany spending cuts of an equivalent size. Meanwhile, the spending cuts would offset the revenue lost to the tax cuts.

July 21, 2010

Considering Unemployment

Justin Katz

Having followed the work of Providence Journal reporter Neil Downing for years, now, I'm confident that it was not a deliberate omission, but I can't help but wonder why a particular factor contributing to economic malaise didn't make it into his recent article about unemployment:

In the current recession  which began in late 2007, and is now in its fourth calendar year  people are often out of work for 6 to 12 months  "if they're lucky to find a job," [URI Professor Edward] Mazze said; many are out of work for more than a year  or longer, he said.

The main reason, Mazze said, is that "no jobs are really being created." Partly because of high rates of foreclosures and consumer debt amid this recession, "businesses are afraid to spend because consumers are not spending," Mazze said.

Businesses and consumers both are facing uncertainty not only because of the depth of the recession but because we've got a "transformative" regime running the country. Massive public debt. Looming changes to healthcare requirements. Environmental regulations appearing inevitable, whether Congressionally enacted or administratively implemented. And the list goes on.

In such an environment, planning for as-yet prospective demand is even riskier than usual.

Under Glass-Steagall, banks were local and regional champions. In New England, for example, Connecticut had Connecticut National Bank and Rhode Island had Fleet Bank. Then, as the states formed regional banking "compacts," New England had Bank of New England and a much-larger Fleet. No matter how well or poorly managed (many failed), these institutions cared. Local and regional bankers knew local and regional businessmen.

Then, in 1994 Congress scrapped state control of interstate banking under Glass-Steagall and allowed nationwide branching. Banks became behemoths with no loyalties and no person-to-person knowledge or understanding of borrowers.

In 1999, Congress repealed the rest of Glass-Steagall, i.e. its separation of commercial and investment banking. And that unleashed huge, highly complex, diversified financial conglomerates -- a very new phenomenon. The short experience with these giants has not been good.

As Anchor Rising readers will surely be able to recite, this is far from the whole story, inasmuch as it was a particular type of asset underlying complex derivatives and forms of investment insurance that catalyzed the collapse. In other words, the bigness and complexity of the banks may have caused problems on their own, but without implicit government backing of  and government incentives for  risky mortgages, investors would not have been as willing to ignore the stability of the table on which the house of cards was being built.

Those tasked with investigating investments  and regulating them, as Jahncke points out  didn't fear the financial structure when they perhaps should have, but they also didn't fear the instability of loans going to people for amounts that they could not afford. Referring back to Marc's post: divided government can, in some instances, get us the least-bad of both sides, but it can also result in a toxic combination, as powerful players find that sweet spot for manipulation in the crack that runs between laissez faire and subsidization.

As for Jahncke's concerns, I'll agree that the Dodd-Frankenstein monster has gone in entirely the wrong direction, essentially writing the problems into the law, and that a different reform could be helpful toward stabilizing the market. But no reform could match a cultural decision that we're all better off knowing our bankers and sticking with those dedicated to our own local markets.

July 11, 2010

Ways to Reduce Unemployment

No one opposes unemployment benefits as a transition aid for people to get back on their feet and find a new job. Unemployment benefits are a safeguard for individuals down on their luck. But to argue that unemployment benefits actually reduce unemployment is disingenuous at best, and could induce our government to enact policies that have the effect of destroying our nation's production base from whence all benefits ultimately flow.

Although some partisans may overextend their spin in the heat of political battle, I think for the most part the arguments for improving the economy and extending unemployment benefits lie along different tracks of reasoning. Most people see payments to the unemployed as a compassionate expense to be balanced against efforts to revive the economy.

I will say, though, that I like Mr. Laffer's suggestion for an alternative stimulus:

Since late 2007 the federal government has spent somewhere around $3.6 trillion to stimulate the economy. That is a lot of money.

My suggestion would have been to take all $3.6 trillion and declare a federal tax holiday for 18 months. No income tax, no corporate profits tax, no capital gains tax, no estate tax, no payroll tax (FICA) either employee or employer, no Medicare or Medicaid taxes, no federal excise taxes, no tariffs, no federal taxes at all, which would have reduced federal revenues by $2.4 trillion annually. Can you imagine where employment would be today? How does a 2.5% unemployment rate sound?

Unfortunately, where government spending is concerned, neither political party emphasizes the greatest economic efficiency. The temptation is too great to convert the money into political currency.

July 10, 2010

Complication Underlies the Conservative Critique

Justin Katz

Jeffrey Friedman's analysis of the origins of our current economic crisis and assessments thereof is worth reading, but he wraps it in the pose that everybody else is wrong:

To their credit, liberal analysts realized from the start that the cause of the recession was a banking crisis, not a housing crisis. In explaining the banking crisis, however, liberals used a theory drawn straight from the rotten core of contemporary social science: the theory of "moral hazard." It suddenly became conventional wisdom that the crisis had been caused by banks that rewarded successful employees with big bonuses but failed to penalize losses. This was said to have encouraged recklessness. Later, conservatives came up with their own variant of moral hazard, according to which bankers took too many risks because they knew that their banks, being "too big to fail," would be bailed out if their bets turned sour; so why not make the riskiest, most lucrative bets?

Most reasonable spectators would, I think, disagree with Friedman in that they'd acknowledge the role of each of these factors  and others, as well. Friedman would respond that the evidence is against them:

The intellectual bankruptcy of these theories lies in their assumption that the bankers knew they were making "reckless" bets. This assumption is demonstrably false: Ninety-three percent of the mortgage-backed bonds acquired by commercial banks either were rated AAA  the safest possible rating  or were issued by Fannie and Freddie, giving them an implicit government guarantee. Because of their perceived lack of risk, these bonds generated less revenue than did bonds with lower ratings. Revenue-hungry bankers who were oblivious to risk never would have bought Fannie, Freddie, or triple-A bonds; more lucrative double-A, single-A, and lower-rated mortgage-backed bonds were always available. Both the liberal and the conservative moral-hazard theories are therefore wrong. For the most part, the bankers didn’t deliberately take big risks, or they would have taken big risks that paid a higher yield.

Friedman ought to have paused before submitting his essay to National Review and considered whether it's plausible to assert that anybody  anybody with a coherent understanding of events  had really made it integral to their scenarios that entities looking for safe, long-term bets (such as pension funds) had been lured into overt risks. For most people and groups with money in the game, the risk was actual, not intentional, although those advising them might have had some inkling of the instability of the underlying assets.

What appears to have happened, in a nutshell, is that the marketplace  consisting of players with various degrees of savvy and awareness  decreased the degree to which it assessed risk in terms of the thing being traded and increased the degree to which it assessed risk in terms of the entities involved. Investors weren't betting on the likelihood that the sun wouldn't come up the next day; they were betting somebody else's assurances that it would not. Because of implicit government backing, traders and ratings agencies gave mortgage-backed securities ratings on par with those given to the government, and because of their size and the safety of being at the top of the ladder, large firms and their agents behaved as if they expected their losses to be mitigated, should things go awry, and because the above put smiley-face stickers on the trades, everybody else bought in.

For none of those involved is an acknowledgment of risk necessary.

Friedman pivots, on this obvious fact, in order to reach the point that truly interests him: That we have to acknowledge the complexity of life and the possibility of error. What's interesting about this, to me, is that Friedman thinks he's introducing something new. Such statements as the following read as if drawn from foundational documents of modern conservative political theory:

The experts, the regulators, and the bankers were ignorant of a risk caused by a complication that hadn’t occurred to them. The experts, regulators, and bankers were wrong; but they were not evil. They were simply outwitted by a complex world. ...

A more sophisticated approach would attend to the fallible ideas not just of voters but of bureaucrats, legislators, and judges  and to the roots of these ideas, both mass and elite, in cultural sources of (mis)information and ideology, such as the mass media and formal education.

All Friedman is doing, here, is describing the basic reasons for the conservative worldview  from libertarian principles of limited government to the Christian belief that evil is an illness and delusion, not an individual personal quality.

July 9, 2010

Hucksters Not Wasting the Crisis

Justin Katz

Funny, I hadn't heard insufficient involvement of "disadvantaged groups" included among the contributing factors to our the economic crisis that supposedly necessitates a stronger government hand in the finance industry. And yet:

Chris Dodd, Barney Frank, and Barack Obama insist that the new financial regulation bill pending a vote in the Senate is a necessity to restore stability to troubled markets. Instead, it looks as though Democrats have been more concerned about quota systems than economic growth. Buried deep within the bill is a requirement for all regulatory agencies with jurisdiction in economic arenas to start beancounting based on ethnicity and gender.

It's almost as if regulation is not a means to correct problems, but an end in itself, expanding government authority to dictate the terms of our social existence.

July 8, 2010

A Reminder of Our Status

Justin Katz

Here's a reminder of why things have to change dramatically in Rhode Island:

Among the states, Rhode Island's [unemployment] rate of 12.3 percent was the highest in the region and the fourth highest in the U.S. Since May 2009, Rhode Island's rate was up 2.1 percentage points and was among 12 states nationally that recorded increases in their jobless rates during the last 12 months.

The rates in the other New England states were: Massachusetts (9.1 percent), Connecticut (8.3 percent), Maine (7.1 percent), New Hampsire (6.4 percent) and Vermont (6.2 percent).

Remember when Rhode Island hit 10% unemployment, and we all began (finally) to worry? Well, no other state in New England has even hit that point, and we may not see it again ever, unless we change our way of doing business.

One of 12 out of 50 states that saw increasing unemployment over the past year. We need to sweep out the State House and rehire the entire state bureaucracy.

July 7, 2010

Hiding in the Treasure Room

Justin Katz

Predictive economic news has been dire, lately. If the dark notes weren't so broadly being sounded, one might suspect a Republican conspiracy to keep a nascent recovery from helping the Democrats. The alternative explanation is that conservatives have been correct in their concerns about the Democrats' method of "stimulating" the economy and that the consequences have begun to appear a few months earlier than government incumbents would prefer.

Of course, such reliable left-wing Democrat voices as New York Times columnist Paul Krugman are doing their best to run that hypothetical conspiracy in reverse, as Stephen Spruiell points out in a recent National Review (subscription required). But the left-right battle is secondary to Spruiell's main topic. Krugman points to the stability of government security interest rates as evidence that people aren't really all that worried about federal debt, to which Spruiell replies:

In some ways, gold is a better indicator of investor concern about the government's finances than are interest rates on government bonds, because at least two forces are keeping those rates irrationally low. First, since the crisis began, the Federal Reserve has injected over $1 trillion of new money into the economy, mostly in the form of loans to the nation's commercial banks at 0 percent interest. Over that same period, these banks have increased their purchases of U.S. government bonds by $500 billion.

David Smick, a financial consultant and author of The World Is Curved, explained the phenomenon in an article for Commentary earlier this year: "The perception now is that Washington has entered a new era of 'political banking.' . . . [Banks] can borrow from the central bank for next to nothing [and] use that borrowed money to buy guaranteed government debt, taking the difference in yields as riskless profit." This is not a bug in the government's strategy for dealing with weakness in the banking system; it is the strategy's central feature. The banking sector's demand for low-risk securities, and the Fed's willingness to finance that demand at 0 percent, have helped banks repair their damaged balance sheets while so far keeping the government's interest rates manageable. With virtually no perceived risk and a Fed eager to finance the purchases, banks don't mind a low return on their investment.

That sounds more than a little like GM's proclamation that it would be paying of government loans ahead of schedule... using other money procured from the federal government. It doesn't take much deep economic thinking to see that one cannot borrow to pay of debts for an extended period of time.

As I've said before, such a strategy only makes sense if the person or entity engaged in the financial activity has reason to expect an increase in income or, in the case of the government, in economic activity. Otherwise, the interest will eat an increasing amount of funds that were already too limited and, in the case of the government, the distortion of market forces will dissuade the sorts of behavior that can create or discover unforeseen economic expansion.

July 6, 2010

The "Stimulus" in Miniature... or Hatchback

It appears that many residents' car tax bills will offer an early illustration of the consequence of the big-spending stimulus pursued by Congress and the White House:

A number of cars, which normally lose value each passing year, have increased in value this year as a result of several economic forces hitting the used car market. ...

"There are less used vehicles out there for people to buy," said [state Vehicle Value Commission Chairwoman Linda] Cwiek, who also is the tax assessor in North Kingstown. She placed blame for the short supply of used cars on the federal "Cash-for-Clunkers" program.

To stimulate a sagging automotive economy and to aid the environment, the federal program offered financial incentives to turn in older vehicles in favor of buying more fuel-efficient models. In all, the program removed 677,842 vehicles from the road and sent them to the shredder. That prevented them from entering the used-car market.

Not only does the government have to take money out of the economy to put money into it (even if it takes from the future), but distortions of the marketplace will ripple. In this case, the effect was exacerbated by the environmentalist lunacy of destroying the cars. Many of us observed at the time that the government was essentially paying out money to ensure that used cars would be more expensive.

On a broader scale, big government-initiated spending only works as a stimulus if the economy is already headed for a breakthrough. Softening the interim with public debt is a gamble that's best hedged, and Obama and the Democrats went all in, mostly in order to prevent government entities from having to contract.

ADDENDUM:

By the way, it looks as if I wasn't so unreasonable to question the General Assembly's change of law allowing vehicle assessments to go up for the purposes of taxation.

July 5, 2010

Earning Happiness

Justin Katz

The behavior of both sides of the liberal-guiltwelfare axis might find some explanation in this line, drawn from a review of Arthur Brooks's The Battle: How the Fight Between Free Enterprise and Big Government Will Shape America's Future by Matthew Continetti (subscription required):

It is not inequality, Brooks writes, that makes people unhappy. It is a lack of self-worth. It is the feeling that success is unearned.

On the welfare-recipient side, Continetti notes:

In 2001, the University of Michigan's Panel Study of Income Dynamics noticed a correlation between welfare dependency and sadness. The panel found that going on the dole increased the chances of feeling "inconsolably sad" by 16 percent. "Welfare recipients," Brooks writes, "are far unhappier than equally poor people who do not get welfare checks." And while Brooks is quick to point out that correlation is not causation, the data certainly suggest that welfare doesn't make you any happier.

On the guilty liberal side, one thinks of the simplified explanation that Rush Limbaugh (gasp!) frequently offers: they know that they're wealthy beyond their merits, so they assume the system that so blessed them must be unjust. Rather than returning their "unearned" rewards, though, they seek to take a smaller amount from everybody  regardless of desert  in order to give to those who have "unearned" and not received.

Move beyond  if you can  the previous paragraph's poke at our pals on the left and focus on Brooks's point, which he states thus, in a 2007 City Journalarticle:

What I found was that economic inequality doesn't frustrate Americans at all. It is, rather, the perceived lack of economic opportunity that makes us unhappy. To focus our policies on inequality, instead of opportunity, is to make a grave errorone that will worsen the very problem we seek to solve and make us generally unhappier to boot.

Pointing out that income inequality in the United States has been expanding because "the rich are getting richer faster than the poor are getting richer," Brooks highlights the astonishing fact that, for some who rail against inequality, discouraging work among the successful is actually a feature, not a bug, of income redistribution:

According to British economist Richard Layard, "If we make taxes commensurate to the damage that an individual does to others when he earns more"the damage to others' happiness, that is"then he will only work harder if there is a true net benefit to society as a whole. It is efficient to discourage work effort that makes society worse off." Work, according to this postmodern argumentcontrary to millennia of moral teachingis no different from a destructive vice like tobacco, which governments sometimes tax in order to discourage people from smoking.

We who are productive, but not yet successful, might wish to interject that making gobs of money typically involves enabling other people to make or save money, too. As we've discussed on Anchor Rising before, replacing the rich folks who run WalMart with an army of mom 'n' pops would eliminate the employment of the large company's relatively well-compensated employees and disallow people of the same economic class from economizing in the way that WalMart's retail model allows.

Unsurprisingly, the difference in perspective ultimately seems to come down to whether one views society as a collection of castes or of individuals. The left sees those who work for WalMart as People Who Work for Walmart and, implicitly, always will. The right sees them as people who currently see WalMart as offering the greatest opportunity given their current circumstances. The poster representative for the former view is the single mother grasping about for any means of supporting her family; the poster representative for the latter view is the young adult making some side cash while learning the benefits of a strong work ethic and developing workplace interpersonal skills.

By way of a disclaimer: these distinctions are false. The single mother is just as apt to see "check out clerk" as a stepping stone, and the young adult may just as likely max out his potential stocking shelves. The point is that one side of the political divide presents current occupation as demonstrated maximum potential without public assistance, while the other side leaves potential up to the individual to demonstrate. (Shades of this difference can also be seen in union lamentations that teachers don't make as much money as others with the same amount of education. The problem is that individuals who go on to higher-paying gigs  say, quarter-million-dollar education commissioner  no longer appear in the "teacher" category.)

As Brooks and Continetti also explain, the effect of attempts to eliminate income inequality don't increase happiness. Because perceived opportunity is the greater contributor to that emotion, their policies actually have the opposite effect. We can take this assessment a step forward if we look to an underlying consequence of the mindset, whether it's conscious or not: The left's policies make government the provider of opportunity. To the extent that the right believes opportunity is provided (rather than seized from amidst the flow of uncontrollable natural and social forces), its policies put the responsibility in the hands of individuals.

June 27, 2010

A Mega High Ratio of Stimulus-Money-Spent-To-Jobs-Created But Did the Dire Economic Crisis Even Exist?

Monique Chartier

Marc Doughty of Pawtucket [H/T the "RISC-Y Business Daily Newsletter" - sign up here] has done the math that I had been meaning to get to:

At the bottom of the June 15 article ("Stimulus-funded jobs appearing") are numbers that should truly frighten anyone who still believes that the government is equipped to put the unemployed back to work.

For $46 million, the state essentially bribed 86 employers to open 270 positions, of which only 32 were filled from a pool of over 800 applicants. Some simple division shows that the cost per job created so far is over $1.4 million. Even if the program succeeded at placing every single qualified applicant, the cost would be over $225,000 per job created, which far exceeds any sort of reasonable return on investment for taxpayers.

It would have been far cheaper to place the applicants on welfare and pay for them to attend GED or community college courses for the duration of their unfortunate circumstances.

Programs like this one (with 4 percent success rates and massive costs financed by public debt) will postpone, not hasten, true economic recovery.

Encouraged by the first wave of such dubious spending launched by his predecessor, President Bush, President Obama insisted that we were justified in saddling future generations with large amounts of our debt because there was a dire economic downturn lurking that absolutely had to be averted by the creation of jobs via lots of government spending. (We're going to pretend for this discussion that much of the stimulus money didn't go to many, many other unrelated "projects".) Yet while all of this government spending was occurring, the vast majority of jobs maintained were in the private sector without a dime of stimulus money. The result has been that the economy continues to stink, though not crash. In fact, despite all of the wild spending (our debt will equal 97% of our GDP next year) Fed Chairman Ben Bernanke observed this week that

financial conditions have become less supportive of economic growth on balance

All that spending. Comparatively few jobs created. Was there ever really an economic disaster about to unfold as President Obama foretold?

June 26, 2010

Government as Lone Shark Collector

Justin Katz

I've written, periodically, about my belief that debt is the new method of indentured servitude. If we can get young adults to enter the working world with hundreds of thousands of dollars in education loans, some additional thousands in credit card debt (incurred on the expectation of profitable labor after graduation), with car loans a near necessity, and housing options pushing them toward entering into mortgages, we've taken away a great deal of the freedom that economic independence imparts. The situation gets chilling if this story is anything more than journalistic sensationalism of a few peculiar cases:

It's not a crime to owe money, and debtors prisons were abolished in the United States in the 19th century. But people are routinely being thrown in jail for failing to pay debts.

In Minnesota, which has some of the most creditor-friendly laws in the country, the use of arrest warrants against debtors has jumped 60 percent over the past four years, with 845 cases in 2009, a Star Tribune analysis of state court data has found.

Not every warrant results in an arrest, but in Minnesota many debtors spend up to 48 hours in cells with criminals. Consumer attorneys say such arrests are increasing in many states, including Arkansas, Arizona and Washington, driven by a bad economy, high consumer debt and a growing industry that buys bad debts and employs every means available to collect.

Whether a debtor is locked up depends largely on where the person lives, because enforcement is inconsistent from state to state, and even county to county.

In Illinois and southwest Indiana, some judges jail debtors for missing court-ordered debt payments. In extreme cases, people stay in jail until they raise a minimum payment. In January, a judge sentenced a Kenney, Ill., man "to indefinite incarceration" until he came up with $300 toward a lumber yard debt.

I expect we'll see this trend expand as the federal government takes on more responsibility in the finance sector, including the bailing out of too-big-to-fail banks. The reality that every loan shark has always known is that some debts cannot be collected. That's the risk of lending. If the government begins stepping in to jail those who fall behind, the public is taking the role of the crooked-nosed debt collector banging on the door and the balance of risk and benefit that makes lending a healthy application of free will and mutual benefit begins to evaporate.

Lamenting the Impossibility of Having and Eating the Cake

Justin Katz

This short article about job prospects for young adults in Greece catches many of the various nuances, but it still seems as if there's a disconnect of cause and effect. Consider:

From their settled perches, the elders criticize and cluck. The young, they say, have either no initiative, a dearth of opportunities, or some combination of the two. They fear that young people will be unable to start their own families and they fret over the prospect of Greece’s demographic undoing.

The youth of Greece are merely responding as the culture in which they were raised taught them. They feel owed  and their elders don't appear to be enthusiastic to undo the government catering that they've enjoyed in order to secure opportunity and a healthy polity for their children. This is the inevitable result of a big nanny-state government.

Now begins another phase, which one suspects was part of the intention of those who strove to set this international movement in motion:

[Twenty-year old Olga] Stefou believes that the government is bound to respond to her discontent. And she has suggestions: Greece should make up its budget shortfall by pulling its 122 troops from Afghanistan and levying steep taxes on the Orthodox Church rather than squeezing the workers, she says.

Moving six score troops from active to inactive duty and transferring wealth from a Church is not going to make up for the demands of unemployed youth with high expectations as to what the world owes them. It is, however, subtle evidence that there are people strategizing to turn a shiftless and insecure generation into a political, quasi-military weapon.

It makes for an interesting, frightening question to consider the addition of the Muslim fanatics currently permeating Europe to the dynamic. Secular revolutionaries may discover that the discontented troops that they've been carefully cultivating find something more compelling in the notion of jihad than of a worker's paradise.

June 20, 2010

BP: Boycotted Petroleum

Justin Katz

Filling in for Dan Yorke, on Friday, Channel 10 reporter Gene Valicenti (another transplanted Jersey boy, by the way) took up the question of whether people feel it's appropriate to boycott BP gas stations as a means of punishing the company for the oil spill in the Gulf of Mexico. Inasmuch as I was busy cutting seventy-two copes for massive crown molding in a coffered kitchen ceiling, I wasn't able to offer my two cents on the air.

I find it highly unlikely that anybody engages in a full boycott of a particular gas station. Rather, people will look for alternatives to a greater or lesser degree based on their impressions of the company. Nobody's going to walk or wait for AAA to bring a can of gasoline for an empty tank rather than pull in to a disliked station. On the other end of the spectrum, it's probably rather easy to push people to pick one or the other competitors on the same intersection and with a price differential of a couple of cents.

Personally, BP's pretentious environmentalish advertising had turned me off enough to engage in a boycott of the most mild sort (milder than my avoidance of dictator Chavez's Citgo stations) even before oil began to flow toward our southern coast. Increasing the intensity of my wallet-vote statement wasn't something that I'd considered, but I don't think it's an irrational decision for people to make.

Valicenti suggested that a boycott would only hurt the local store owner, but look, there has to be a consumer consequence for big companies. We've already got the federal government bailing out corporations that have gained a substantial claim on our economy; allowing companies to hide behind their employees and franchisees when they mess up would further undermine the very mechanism that makes capitalism a system for efficiency and quality. If a company like BP needn't fear consumer backlash, then it really will become solely the role of governments to impose penalties.

That ties in with a secondary argument that Valicenti put forward  namely, that boycotting BP would do no good, because the company would just move its product elsewhere. That's baloney on its face. That the company spends so much on developing and disseminating marketing materials in the Rhode Island market (for example) proves that it is very interested in ensuring that Rhode Islanders think well of it. The executives know that gas stations compete on the basis of mere pennies and that even something as superficial as dislike of a corporate logo can make the difference in consumer choices. Clearly, their response to pervasive anger at their brand is not something that they would brush aside.

To boycott or not to boycott BP is not a question in which I'm inclined to invest much passion. It's a matter of practicality and preference. By contrast, striving to argue against a boycott on philosophical or structural grounds could actually do harm to our economic and political system.

June 8, 2010

Spend to Punish

Justin Katz

In response to the Providence City Council's useless declaration condemning Arizona's controversial immigration law, Domenick Fabrizio, of Cumberland, has a suggestion:

Since this city council wants to use economics to punish Arizona, my wife and I have decided to draw an economic line in the sand. We've decided to boycott organizations in Providence that we have frequented for years, including the Barker Playhouse, the Providence Performing Arts Center, the Providence Place mall, the Rhode Island Philharmonic and several restaurants.

We urge others who agree with us to do the same.

The first consideration ought to be the state of the economy, and anything that hinders that is inadvisable. More deeply, though, an economic boycott in response to the foolishness of city officials seems to punish the wrong people; those who are actually out there being productive are probably not the decisive factor in electing such goons. Of course, one must adjust for the left-leaning inclinations of the specific industries, mainly in arts and entertainment, that Fabrizio lists. Increasing economic pain and government dependency would conceivably have an opposite effect to that desired, when it comes to electoral politics.

So, don't boycott. Spend more, but in targeted fashion in order to encourage business and maybe to put money into the hands of folks who'll support a change of government in the city.

Tax Hikes and V Number 2

Justin Katz

Not to kick off a beautiful Tuesday with gloom, but it seems inescapable. Environmental catastrophes, lingering war, emboldened terrorist states, and shifting demographics in the West that give those terrorist states reason for optimism about the future would each be bad enough, but the economy is what brings the world's problems to the front doors of every American. And on that topic, there appears to be an expanding feeling that recovery is not pending.

Now, if people know tax rates will be higher next year than they are this year, what will those people do this year? They will shift production and income out of next year into this year to the extent possible. As a result, income this year has already been inflated above where it otherwise should be and next year, 2011, income will be lower than it otherwise should be.

Also, the prospect of rising prices, higher interest rates and more regulations next year will further entice demand and supply to be shifted from 2011 into 2010. In my view, this shift of income and demand is a major reason that the economy in 2010 has appeared as strong as it has. When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe "double dip" recession.

I hope he's wrong. Given everything else going on in the world, an economically depressed, socially dispirited United States will be an ineffective beacon during the dark days ahead.

June 7, 2010

Government Doesn't Create Jobs...

Justin Katz

... at best it borrows them, and while I certainly hope I'm wrong, I'm concerned that we're just not going to experience significant job growth for the foreseeable future:

A burst of government hiring of temporary census workers pushed the nation's unemployment rate down a fraction in May, but private-sector employers added a mere 41,000 new jobs last month  a figure so disappointing it sparked a huge sell-off on Wall Street and sowed fresh angst about the economy's future.

Adding to the worries was the fact that, so far this year, the bulk of the new private sector jobs have been going to workers with a high school education or less instead of to the middle-class workers on whom any long-term return to prosperity depends.

On the radio, Friday, I heard President Obama claiming the gradual success of the economic policies that "we" put in place over the past year, but I didn't get the impression that he was referencing the hiring plans of the Census. The reality, at the national level, is that the Democrats have made advancing their agenda and preserving past gains (as with public-sector growth) a higher priority than jobs and the economy. At the Rhode Island state level, the Democrats are shuffling chairs around and hoping for some sort of windfall miracle.

It may or may not be reasonable to extrapolate local evidence to national government, but one interesting aspect of the local debate is that the General Assembly clearly understands what sorts of noises it needs to be making. The budget is notable in its attempt to wash state government's hands of tax increases; the tax system "overhaul" makes some revenue-neutral tweaks without addressing the fundamental problem of too much government confiscation; and the legislation "making business easier in Rhode Island" cleans up some government-imposed nuisances but doesn't touch the mandates and regulations that create the real disincentives to economic activity, here.

May 25, 2010

Growing Gov't, Shrinking Priv't Sector

Marc Comtois

USA Todayreports that recent number from the Bureau of Economic Analysis confirm what many people have sensed: private wages are shrinking while government grows. The facts:

* Private wages. A record-low 41.9% of the nation's personal income came from private wages and salaries in the first quarter, down from 44.6% when the recession began in December 2007 {and down from 47.6% in 2000--ed.}.

* Government benefits. Individuals got 17.9% of their income from government programs in the first quarter, up from 14.2% when the recession started {and up from 12.1% in 2000--ed.}. Programs for the elderly, the poor and the unemployed all grew in cost and importance. An additional 9.8% of personal income was paid as wages to government employees.

The spin, for and against:

The trend is not sustainable, says University of Michigan economist Donald Grimes. Reason: The federal government depends on private wages to generate income taxes to pay for its ever-more-expensive programs. Government-generated income is taxed at lower rates or not at all, he says. "This is really important," Grimes says.

The recession has erased 8 million private jobs. Even before the downturn, private wages were eroding because of the substitution of health and pension benefits for taxable salaries....The shift in income shows that the federal government's stimulus efforts have been effective, says Paul Van de Water, an economist at the liberal Center on Budget and Policy Priorities.

"It's the system working as it should," Van de Water says. Government is stimulating growth and helping people in need, he says. As the economy recovers, private wages will rebound, he says.

Economist Veronique de Rugy of the free-market Mercatus Center at George Mason University says the riots in Greece over cutting benefits to close a huge budget deficit are a warning about unsustainable income programs.

Economist David Henderson of the conservative Hoover Institution says a shift from private wages to government benefits saps the economy of dynamism. "People are paid for being rather than for producing," he says.

It doesn't look like the current administration is going to do much to change the trends, but, as de Rugy suggests, maybe Americans will learn lessons from the Greek crisis and take action on their own.

More of What Americans Don't Want

Justin Katz

The financial regulation legislation  which has passed both houses and is awaiting reconciliation  hasn't raised the ire that healthcare did before it. Several factors come play into that dynamic no doubt: financial regulation is less tangible, Wall Street makes a better villain than insurance companies, folks are tired from the healthcare skirmish, and so on. But it still represents fine evidence that we need wholesale change of the people representing us in Washington.

Much too much has been made of the $50 billion resolution fund and the levy that financial firms would pay to fund it. Senator McConnell abominated it as a "bailout fund," but he was paying attention to the wrong pot of money: That $50 billion is a little ladle-load of cashola compared with the buckets of schmundo that the Dodd bill will make available for indirect bailouts and endless support of troubled businesses  financial and non-financial firms alike. Case-by-case interventions may be out, but the bill would allow  in fact, appears designed to ensure  bailouts for the creditors of troubled firms. Under the Dodd bill, Wall Street firms (or unions, or sovereign-wealth funds, or anybody else with the right political connections) who are exposed to losses on failing financial companies will be able to collect significantly more money than they would be able to under normal bankruptcy procedures. That is the bailout.

We've seen this before, of course. The AIG bailout, for instance, amounted to bailout of Goldman Sachs and other banks that had a lot of AIG exposure and would have had a harder time being made whole in bankruptcy court than they did under Washington's management. The Dodd bill instructs that the government shall "ensure that unsecured creditors bear losses in accordance with the priority of claim provisions" in the existing law  but how well has that worked out in the past? What legal authority did the Obama administration have to upend the normal priority of claims in the bailout of General Motors, a corrupt deal that saw secured creditors forced to take substantial losses while unsecured creditors received a better deal than they were legally entitled to  all because those unsecured creditors were the union bosses who put Barack Obama into the White House? That wasn't just a bailout of GM; it was also a bailout of the UAW. That's the kind of bailout regime that the Dodd bill will make permanent: the indirect bailout.

May 23, 2010

The Fatal Bubble

Justin Katz

What defines an economic bubble? There are probably technical answers to that question, perhaps even involving percentages and such, but the basic inference is an apparent growth that's really just full of air, deceiving people into behaving as if the cause of the increase is actually something of substance when, in reality, it could dissipate immediately upon exposure to the atmosphere.

In a recent letter to the Providence Journal, Philip Overton, of Westerly, expresses something that has likely been nagging at a great many of us, in recent months and years:

There is no fiscal integrity in our government right now and this is the next possible great bubble building.

The substance in which we've been deceived to believing is that the government can absorb the vicissitudes of the economy. We're relying more and more on government not only to fill the craters that other bubbles have left when they've popped, not only to fill other bubbles (sometimes in the form of doomed companies), but also to conduct matters of economy and even personal well-being. It can't last.

The only question is what happens when the government bubble bursts. A free-for-all of wealth grabbing and recriminations seems likely, and let's not forget that there are those on the global playground relentless in the eye that they keep on our every step, in the hopes that the lone superpower will falter.

May 22, 2010

Advancing in the Melting Pot

Justin Katz

Ron Haskins seeks to answer the question of whether the United States of America is really the land of bootstrap advancement and personal opportunity (subscription required). In a nutshell, he does find economic advancement from generation to generation, but by the numbers, it appears that the economic quintile of one's parents is more determinative in America than in other Western countries.

But he points out a factor that is too often lost, and that (I'd argue) applies to a wide variety of comparisons. Healthcare comes to mind.

One of the annoying features of many media stories and political speeches about the evidence reviewed here is that the popular accounts make it seem that impersonal social forces, especially the American economy and government policy, entirely determine the opportunities new generations will find as they grow up. Leaving aside the fact that, as we have seen, the American economy has been exceptionally productive, and the fact that the federal government alone spends $750 billion (5.7 percent of GDP) on mobility-enhancing programs, the critics hardly mention the vital role of parental and personal responsibility.

The fact that personal responsibility plays a major role in mobility and economic well-being can be easily demonstrated. The three basic rules of success in America are that young people should finish their educations (at least high school), get jobs, and get married before having children. Computations based on Census data that my Brookings Institution colleague Isabel Sawhill performed for our recent book, Creating an Opportunity Society, show that kids who follow these rules have a 74 percent chance of winding up in the middle class (defined as income of $50,000 or more) and a mere 2 percent chance of winding up in poverty ($17,200 for a family of three in 2008). By contrast, young people who violate all three of these rules have only a 7 percent chance of winding up in the middle class and a 76 percent chance of winding up in poverty.

One could say that the U.S. has built a structure for opportunity and given everybody the rulebook, but it does not force citizens to follow it. Indeed, progressive policies over the past century have created unhealthy incentive to stay put, economically, and the identity politics and political correctness of the past few decades have sealed the fates of too many.

So we're back to the left/right divide. One side looks at a lack of universal economic opportunity, regardless of personal outlook, and insists that the American system be replaced with something centrally planned and designed to guarantee individual results. (Put aside the clear fantasy of that objective.) The other side replies that costless cultural changes and the acceptance of some degree of risk will yield better results for the individual and for our shared culture and economy.

May 20, 2010

Not the Cause of the Surplus Swing

Justin Katz

One gets the sense that when certain commentators on the left claim that "tax cuts for the rich" were the most substantial cause of our government's deficit, they simply mean that the cuts were the part that they liked the least. According to Brian Riedl, the tax cuts  especially just those for "the rich"  have been a relatively minor factor:

... among tax-increase advocates, it has become an article of faith that President Bush's 2001 and 2003 tax cuts caused the budget deficit. Newsweeks Fareed Zakaria echoed this conventional wisdom recently: "The Bush tax cuts are the single largest part of the black hole that is the federal budget deficit." Similarly, in 2004, when Sen. John Kerry , Massachusetts Democrat, accused Mr. Bush of having "taken a $5.6 trillion surplus and turned it into deficits as far as the eye can see," he focused on "Bush's unaffordable tax cuts for the wealthiest people." ...

Instead, the largest cause of the swing (33 percent) was economic and technical revisions, arising from CBOs understandable failure to anticipate two recessions and two major stock market corrections over the next decade. Other causes of the lost surplus were the 2009 stimulus (6 percent), other new spending (32 percent), new net interest costs (12 percent), and other small tax cuts and tax rebates (3 percent). ...

Furthermore, Mr. Kerrys quote further singled out "tax cuts for the wealthiest people." On that theme, Mr. Obama has proposed ending the tax cuts only for those earning more than $250,000 annually. Yet CBO data shows that just 25 percent of the tax cuts went to those making more than $250,000. Therefore, the "tax cuts for the wealthiest" come to approximately 4 percent of the total swing from projected surpluses to actual deficits.

I guess that massive amount of new spending (initiated under Bush and taken to the heights of parody under the current administration) doesn't count, though, since it was good and noble and just what government ought to be doing.

May 15, 2010

Challenging the increasing momentum toward a nanny state

As Obama, Pelosi and Reid accelerate the implementation of statist practices in America - building on what Bush started - it is helpful and necessary to reacquaint ourselves with fundamental economic principles and some specific significant issues animating today's public debate.

FUNDAMENTAL ECONOMIC PRINCIPLES

The 17-blog post series below was originally put together in 2006 and contains excerpts from the writings of Thomas Sowell, Reason magazine, Bruce Caldwell, Friederich Hayek, Milton Friedman, Arthur Seldon, Gordon Tullock, Jane Shaw, Lawrence Reed, The Freeman magazine, Leonard Read, Donald Boudreaux, John Gray, Bertrand de Jouvenel, and Michael Novak, with links to others like Walter Williams, David Boaz, and David Schmidtz:

No matter how emphatically these politicians rant and rave in their effort to re-write history, they cannot re-write the basic laws of economics. As a Reverend once said, those chickens will come home to roost at some point. The only question is when and how big a price we will pay when it happens.

PRIMERS ON ECONOMICS

As some of the above posts note and as further ammunition for the public debate, these books are excellent primers on important economic topics:

May 14, 2010

Congress Should Lambaste Itself at a Hearing

Justin Katz

It takes more than one entity to blow up an economy, but Congress is auspiciously positioned to deflect the blame that it ought to shoulder. Writes James Pethokoukis:

It's not news that many senators appear to have only a tenuous grasp of the financial industry. But Glassman's larger point is more relevant. It's not just that Congress doesn't understand what Goldman, as a market-maker, does  it's also that elected officials may not recognize that the financial crisis was rooted in Washington as well as Wall Street.

I'd suggest that it would be more accurate to say that they don't care to know. Pethokoukis goes on to cite a study by Brown Professor Ros Levine:

1) Credit Ratings Agencies. While the crisis does not have a single cause, the behavior of the credit rating agencies is a defining characteristic. It is impossible to imagine the current crisis without the activities of the NRSROs. And, it is difficult to imagine the behavior of the NRSROs without the regulations that permitted, protected, and encouraged their activities. … Rather the evidence is most consistent with the view that regulatory policies and Congressional laws protected and encouraged the behavior of NRSROs.

2) Credit Default Swaps. I am suggesting that the evolution of the CDS market, the fragility of the banks, and the Fed's capital rules illustrate a key feature of the financial crisis that is frequently ignored. The problems with CDSs and bank capital were not a surprise in 2008; there was ample warning that things were going awry. Senior government policymakers created policies that encouraged excessive risk taking by bankers and adhered to those policies over many years even as they learned about the ramifications of their policies.

3) The SEC and Investment Banks. Consider three interrelated SEC decisions regarding the regulation of investment banks. First, the SEC in 2004 exempted the five largest investment banks from the net capital rule, which was a 1975 rule for computing minimum capital standards at broker- dealers. Second, in a related, coordinated 2004 policy change, the SEC enacted a rule that induced the five investment banks to become "consolidated supervised entities" (CSEs): The SEC would oversee the entire financial firm. Specifically, the SEC now had responsibility for supervising the holding company, broker-dealer affiliates, and all other affiliates on a consolidated basis. Third, the SEC neutered its ability to conduct consolidated supervision of major investment banks. … The combination of these three policies contributed to the onset, magnitude, and breadth of the financial crisis. The SEC's decisions created enormous latitude and incentives for investment banks to increase risk, and they did.

4) Fannie and Freddie. Deterioration in the financial condition of the GSEs was not a surprise. … But, Congress did not respond and allowed increasingly fragile GSEs to endanger the entire financial system. It is difficult to discern why. Some did not want to jeopardize the increased provision of affordable housing. Many received generous financial support from the GSEs in return for their protection. For the purposes of this paper, the critical issue is that policymakers did not respond as the GSEs became systemically fragile. Again, I am not arguing that the timing, extent, and full nature of the housing bubble were perfectly known. I am arguing that policymakers created incentives for massive risk-taking by the GSEs and then did not respond to information that this risk-taking threatened the financial system.

Although the mildest thing that one can say is that misregulation by the federal government was a key component of the collapse of the financial industry, the solution being proffered by Congress and the President is more regulation. I suppose that, under some circumstances, that might be a rational response, but when Congress clearly has not learned its lesson  by, for example, allowing Fannie Mae and Freddie Mac to dissolve  it's a bit like trying to kill the illness with more poison.

May 10, 2010

A Threshold for Debt

Justin Katz

Folks fond of those politically motivated "clocks" that show how much something has cost or how long we have to some catastrophe should update their debt clocks. According to Moody's, the United States could be just a few years from a credit rating downgrade:

Spiraling debt is Uncle Sam's shock collar, and its jolt may await like an invisible pet fence.

"Nobody knows when you bump up against the limit, but you know when it happens it will really hurt," said fiscal watchdog Maya MacGuineas of the Committee for a Responsible Federal Budget.

The great uncertainty about how much debt is too much has tended to make fiscal discipline seem less urgent, rather than more. There is no obvious threshold beyond which investors will demand higher real yields for holding U.S. debt. Vague warnings from ratings agencies about the loss of America's 'AAA' status haven't added much clarity #151; until recently.

Estimates are that the threshold comes when debt service equals about one fifth of revenue. The Congressional Budget Office puts that date at 2018, but changes in circumstances  such as increasing interest rates  could move it up to 2013. In other words, debt cannot be a solution much longer, and given that a government that has spent the last year in a final flamboyant push of decades of spending increases will not be likely to undo what it has just accomplished, revenue will have to be raised.

May 5, 2010

Investing Is Gambling, by Definition

Justin Katz

The necessary qualifier is that I agree with Mark Patinkin about the immoral behavior of Goldman Sachs. If I had money to invest, I would most definitely invest it elsewhere, and if I already had that money with Goldman, I'd move it. There's a moral obligation to punish companies, in that way, and it's the credulous person, indeed, who can trust Goldman Sachs in particular.

But truth be told, it's a credulous person who trusts Wall Street players more than is absolutely necessary, to begin with. They've been greedy villains in the popular mind at least for decades. Yet, Patinkin writes:

Some have said it's different for Goldman’s individual clients  those who give their personal portfolios to Goldman to manage.

But in truth, there are conflicts even on that level. Goldman doesn't just put such clients into the same mix of stocks and bonds the independent broker down the block might pick. Houses like Goldman are known to push their own in-house funds on investors  including hedge funds. That's a good deal for Goldman, since they charge a few percent in fees on the investor's portfolio value  as well as a staggering 20 percent of profits the investor gets if the hedge fund goes up. You'd think such outsized profits would mean clients, out of fairness, get a break if the hedge fund goes down, or underperforms. Hardly. It's a heads-they-win, tails-you-lose game. If the funds tank, the firms still take percentage fees for their bad work. And worse, clients aren't able to get out of those bad hedge funds for months or more, since the rules lock them in for set periods. So if Goldman's fund managers place stupid bets, as they certainly have in the recent past, investors have to keep riding them downhill.

The heads I win, tails you lose, game was written into the rules from the beginning. The problem, over the past couple of decades, is that we began to persuade ourselves that they were suspended by success. With government backing giving a sense of security to risky mortgages and with the same individual daydream that keeps people funding governments through lottery revenue, we thought we could play the investors' game without real risk, and without the careful bet hedging and self preservation that characterizes the large firms.

If we're to learn from current events, we must not only investigate the factors that kept us from having information that we could have used, but ponder the factors that kept us from acting on information that we already had.

May 4, 2010

The Gang Striving for Cap and Trade

Justin Katz

Sometimes you get a glimpse behind the closed doors of powerful people's decision-making rooms, and it's interesting how familiar names keep popping up. An Investor's Business Dailyeditorial on the Chicago Climate Exchange provides such an inkling.

The CCX is up and running as a mechanism for trading offsets for "all six greenhouse gases." It was initiated with start-up grants from the Joyce Foundation, on whose board Barack Obama sat at the time. The organization has since been purchased by the British company, Generation Investment Management, of which Al Gore is a co-founder.

Other founders include former Goldman Sachs partner David Blood, as well as Mark Ferguson and Peter Harris, also of Goldman Sachs. In 2006, CCX received a big boost when another investor bought a 10% stake on the prospect of making a great deal of money for itself. That investor was Goldman Sachs, now under the gun for selling financial instruments it knew were doomed to fail.

The actual mechanism for trading on the exchange was purchased and patented by none other than Franklin Raines, who was CEO of Fannie Mae at the time.

In a way it's disappointing to think how much of our heated political culture ultimately comes down to the crass motivation of personal financial gain. It's frustrating, too, because once it all gets bound up in ideology and politics, the schemes become disguised in other people's battles about other matters.

Basically, these glimpses ought to be taken as reason to resist large, centralized government, especially at a global level.

May 2, 2010

Big government, crony capitalism and the latest from Government Motors

Donald B. Hawthorne

Big government, whom some foolishly think is the pathway to so-called social justice for the little guy, actually has the opposite effect. It incentivizes big corporations, big unions and other powerful organizations to feed at the enlarged government trough to buy favors at the expense of those unable to pay for a place at the trough. This leads to what used to be called "corporate (or union) welfare" and some now call "crony capitalism."

Whatever the label, the result is the same: Transparent competition in the marketplace that benefits consumers is trumped by the non-transparent buying of legal or regulatory favors that benefit the few at the expense of the many. In other words, big government enables the powerful to prey on others, as predicted by public choice economic theory. How ironic it is then that when the structural incentives created by big government cause the forecasted negative outcomes, the advocates for big government call for yet more of the same.

Why do these negative outcomes surprise any of us? Take ObamaCare, where the Congress passed and the President signed a 2,200-page bill that no one had read. Forget for a moment how passing such a large bill that no one read should startle all of us into loud protests. The bill now goes to unelected, unaccountable, nameless, faceless bureaucrats for the development of endless pages of regulations, the existence of which will only further ensure their job stability. Does anyone really think those uniform regulations drafted in the vacuum of government office buildings in the nation's capital will provide easier access to better healthcare services by being responsive to the differing needs of a cross-section of citizens in, say, Peoria, Illinois, Chandler, Arizona, Tucker, Georgia, and Yakima, Washington? But you can be assured that large insurers and medical service companies will have their lobbyists walking the hallways to influence the regulations in ways that are responsive to their own economic needs. Again, the irony: These companies do it not because they are evil but because they are responding rationally to their adjusted self-interest as determined by the new economic incentives created by the ObamaCare legislation.

So when government seeks to play God and takes over activities best done by the free market, there are adverse consequences. (Just like so-called "campaign finance reform" in an era of big government has created its own set of perverse incentives that result in more money flowing into politics in different and often less visible ways.)

Contemplate the perverse incentives created by these unfolding developments. How would a corporation ordinarily fund new projects? Usually out of positive operating cash flow generated from profits of the business, a scenario that would only happen after the project successfully competed against other internal capital project alternatives advocated by other executives through showing more compelling projected financial returns. (Of course, this funding approach would require GM to be profitable and generating positive cash flow, but I digress.) Alternatively, GM could get the money from new equity investors or lenders. Which means they would have to convince those investors or lenders to bet on their plan, in part based on the merits of the plan and in part based on management's past track record. In parallel, these investors and lenders are getting measured quarterly by their own funding sources based on the quality of their performance in comparison to other current investment alternatives available to the funding sources. If equity investors or lenders enter into bad deals, their funding sources will pull back, adversely impacting their business. So the equity investors and lenders have an incentive to deeply scrutinize a GM deal and evaluate its merits in competition with all the alternative deals they could do at the time. But that is not how crony capitalism works: GM only has to privately curry favor in Washington, D.C. among bureaucrats who become more influential when they respond favorably to such behavior, who become even more influential when they have larger projects like the new DOE loans, who have no effective mechanisms for oversight and accountability, and who suffer no adverse consequences if they enter into bad deals.

By the way, to add insult to injury for taxpayers, the political pressure to rush through bankruptcy without the requisite time for an adequate restructuring of their cost structure no doubt contributed to GM (and the other ward of the state, Chrysler) losing billions of dollars last quarter in their first quarter after exiting bankruptcy. For all we know, the rationale for the DOE loan could be to fund changes that ordinarily would have been accomplished in a proper bankruptcy restructuring. Meanwhile Ford, which faced market realities the free market way, turned a profit.

The loss of liberty and cost to taxpayers are profound when you look at the particulars of crony capitalism created by big government.

It was bad enough that we had to bail out the banks, but at least you could make a reasonable argument that we had to--we know what happens when you allow widespread bank runs, and its generally pretty disastrous for the citizenry. But you know what happens when a large auto manufacturer fails? Its employees and customers have to do business somewhere else...

It was sheer political theater, and incredibly corrosive to public trust in our government institutions, as well as a gross misallocation of economic resources. The role of the state is to prevent human suffering, not prop up failing enterprises that happen to have politically well-connected employees. I am genuinely struggling to come up with what principled argument Andrew might be making in his head for what has always struck me as a pretty blatant handout to a powerful Democratic interest group.

This article by Gretchen Morrison in the New York Times is significant for two reasons. First, the Times has decided to give this significant coverage, which means the story of GM's misleading claim of paying back the taxpayer-funded bailout will continue to have some legs. More importantly, it also points the finger at Treasury and the Obama administration for its complicity in allowing CEO Ed Whitacre to make those claims without challenge...

[quoting from the Times' article]: G.M. also crowed about its loan repayment in a national television ad and the United States Treasury also marked the moment with a press release: "We are encouraged that G.M. has repaid its debt well ahead of schedule and confident that the company is on a strong path to viability," said Timothy F. Geithner, the Treasury secretary.

Taxpayers are naturally eager for news about bailout repayments. But what neither G.M. nor the Treasury disclosed was that the company simply used other funds held by the Treasury to pay off its original loan.

Whitacre and GM omitted two facts that render their public relations blitz highly misleading. They are the kind of omissions that constitute securities fraud when made by a company in connection with the purchase or sale of a security or when a company reports its financial results...

GM's fraudulent public relations blitz took place with the support of the Obama administration, up to and including Secretary of the Treasury Timothy Geithner. Geithner's participation makes his tax cheating and related testimony pale in comparison.

In retrospect, it is obvious that GM undertook the blitz at the behest of the Obama administration. It is symptomatic of the era of national socialism in which we find ourselves, and for which GM is a leading indicator.

In reality, it looks like GM merely used one source of TARP funds to repay another. The taxpayers are still on the hook, and whether TARP funds are ultimately recovered depends entirely on the government's ability to sell GM stock in the future. Treasury has merely exchanged a legal right to repayment for an uncertain hope of sharing in the future growth of GM. A debt-for-equity swap is not a repayment.

I am also troubled by the timing of this latest maneuver. According to Mr. Barofsky, Treasury had supervisory authority over GM's use of these TARP escrow funds. Since GM's exit from bankruptcy court, Treasury had approved the use of the escrow funds for costs such as GM's obligations to its parts supplier Delphi.

Tapscott concludes with this observation:

...Accusations and worries of improper government interference with business are inevitable results of government picking winners and losers in the private economy, as was done with the trillions of tax dollars used by the Bush and Obama administrations to bail out Wall Street investment firms, GM and Chrysler, insurance giant AIG, and multiple banks.

There is a name for the kind of regime that allows private ownership of businesses but effectively tells them what to produce and sell. It's called Fascism. America is far from there, but becoming a bailout nation is a significant step in the wrong direction.

April 29, 2010

Who gets to play God?

Now, what we're doing, I want to be clear, we're not trying to push financial reform because we begrudge success that's fairly earned. I mean, I do think at a certain point you've made enough money.

What does "success fairly earned" or "enough money" mean?

Who defines "success fairly earned" or "enough money"?

What if different people define "success fairly earned" or "enough money" differently?

Who defines the consequences of having more than "enough money"?

Who enforces such consequences?

If anyone thinks the definition or consequences of "enough money" is unjust, to whom do they turn for relief?

In other words, who gets to play God?

Any way you cut it, implementing policies consistent with Obama's words will require coercive actions that diminish liberty. There seems to be a certain amnesia about the coercive nature of government. Of course, it might be reasonable to say there is no amnesia for people who never recognize coercion because they have always sought power more than they have loved liberty.

On a more practical level, Nobel Laureate Hayek wrote about the impossibility of efforts to centrally plan such "solutions" in the first place in his seminal 1945 paper entitled The Use of Knowledge in Society. Glenn Reynolds referenced the paper in a recent editorial:

...The United States Code - containing federal statutory law - is more than 50,000 pages long and comprises 40 volumes. The Code of Federal Regulations, which indexes administrative rules, is 161,117 pages long and composes 226 volumes.

No one on Earth understands them all, and the potential interaction among all the different rules would choke a supercomputer. This means, of course, that when Congress changes the law, it not only can't be aware of all the real-world complications it's producing, it can't even understand the legal and regulatory implications of what it's doing.

There's good news and bad news in that. The bad news is obvious: We're governed not just by people who do screw up constantly, but by people who can't help but screw up constantly. So long as the government is this large and overweening, no amount of effort at securing smarter people or "better" rules will do any good: Incompetence is built into the system.

The good news is less obvious, but just as important: While we rightly fear a too-powerful government, this regulatory knowledge problem will ensure plenty of public stumbles and embarrassments, helping to remind people that those who seek to rule us really don't know what they're doing.

..."I want to be clear, we're not trying to push financial reform because we begrudge success that's fairly earned. I mean, I do think at a certain point you've made enough money. But part of the American way is you can just keep on making it if you're providing a good product or you're providing a good service. We don't want people to stop fulfilling the core responsibilities of the financial system to help grow the economy."

The second sentence is the one that defines "fairly earned" for Obama. The man who as a candidate spoke of "spreading the wealth around" has found a matter he considers within his pay grade: other people's pay.

Whistling Past the Regulatory Problem

Wall Street is on the wrong side of this fight. It insists that reining in that -- those excesses would unduly restrict the free market that is the engine of American progress.

But this -- this market of ours isn't free of self-dealing or conflict of interest. It isn't free of gambling debts that taxpayers end up paying.

It isn't free of those debts because  primarily by backing risky mortgages through Fannie Mae and Freddie Mac and increasing barriers to competition with regulatory bars to clear  the government has allowed too-big-to-fail bailouts to become an implicit part of the economy. Layering on regulations will only increase complexity and the potential for the manipulation of the financial industry, whether for financial or political purposes.

April 28, 2010

Regulating Something Other than the Problem

Justin Katz

Veronique De Rugy argues that deregulation was not the culprit in the current economic crisis:

The great villain in the deregulation myth is the Gramm-Leach-Bliley Act, signed into law by Bill Clinton in 1999, which repealed some restrictions of the Depression-era Glass-Steagall Act, namely those preventing bank holding companies from owning other kinds of financial firms. Critics charge that Gramm-Leach-Bliley broke down the walls between banks and other kinds of financial institutions, thereby allowing enormous systemic risk to percolate through the financial world. This critique is the keystone of the "blame deregulation" case, but it doesn't hold up: While Gramm-Leach-Bliley did facilitate a number of mergers and the general consolidation of the financial-services industry, it did not eliminate restrictions on traditional depository banks' securities activities. In any case, it was investment banks, such as Lehman Brothers, that were at the center of the crisis, and they would have been able to make the same bad investments if Gramm-Leach-Bliley had never been passed.

Another common claim, that credit-default swaps and other derivatives left unregulated by the Commodity Futures Modernization Act of 2000 were a cause of the financial crisis, doesn't stand up to scrutiny, either. Research by Houman Shadab of the Mercatus Center has shown that this argument is undermined by its failure to distinguish between credit-default swaps, which are simply insurance against loan defaults, and the actual bad loans and mortgage-backed securities at the root of the crisis. Stricter regulation of credit-default swaps wasn't going to make those subprime mortgages any less likely to go bad.

There is room to argue that stricter regulation might have prevented risky loans from permeating the economy so deeply. Such arguments, however, assume that regulators would have targeted the correct risks, when the evidence  indeed, the origin of the crisis  suggests that government officials would not have (and still would not) dampened the trends that needed dampening.

As conservatives have been arguing for quite some time, the implicit government backing of bad mortgage loans through Fannie Mae and Freddie Mac was the key ingredient encouraging the financial industry to treat such mortgages as too safe of an investment. De Rugy notes that Fannie and Freddie "guarantee[d] nearly $5 trillion in home loans with a mere $100 billion in net equity." She also highlights decreases in capital ratios permitted by the regulators themselves.

I suppose there's a case to be made that regulations that counteracted incentives that the government created with low interest and financial backing of bad mortgages would be to the good. But why not just stop creating those incentives by decreasing the role of government?

April 26, 2010

The Environmental Mandate

Rhode Island may take another step toward addressing climate change issues if the General Assembly passes legislation initiated by students in the environmental studies program at Brown University.

The bill, introduced by Sen. Joshua Miller, D-Cranston, calls for the creation of a study commission to monitor the impacts of climate change in Rhode Island and recommend responses to the government. An identical bill was introduced in the House by state Rep. David Segal, D-Providence.

The legislation also would require cities and towns to account for climate change when doing their comprehensive plans and mandate the state’s Emergency Management Agency to set up an automated system to alert the elderly about extreme weather.

But one can hardly avoid the feeling of futility. The Brown students who put together the report believe climate changes are on their way regardless of mitigation efforts, but even were that not the case, with a volcano pumping out ash just a short distance across the Atlantic, the relevance of "green" construction for public buildings in the state seems nigh upon nil.

Even an editorial a few pages away in the Providence Journal suggests the point:

Scientists believe that a volcanic eruption in northern Sumatra 74,000 years ago brought humans to the brink of extinction, blotting out much of the light of the sun with ash for six years, robbing plants of the rays they need to grow. The human population shrank to a few thousand, some scientists believe.

The forces that shape this planet continue to make themselves felt as people delude themselves into thinking that we can control nature.

I think also of gigantic blasts from the sun arching across an area of space 100 times the size of the Earth. We human beings are having enough difficulty taking care of ourselves without putting the weight of the globe on a few extra miles per gallon and some squiggly light bulbs.

None of this is to say that people interested in such matters shouldn't continue to research them and to make suggestions, and that the rest of us shouldn't follow such suggestions as aren't too disruptive. When it comes to action by state and federal governments, disruption is unavoidable. Andrew McCarthy puts it well in the context of an intraconservative spat:

You say: "Put yourself in the position of a senior government leader tasked with making real decisions that affect the lives of millions. What would you do if faced with a matter of technical disagreement on such a quantitative-prediction question among experts?" I'll tell you what I would do. I would say that, given our finite capabilities and the shortness of life, AGW [anthropogenic global warming] may not be a problem at all, and, if it is a problem, it is not urgent enough to obsess over. Not if I am a senior government leader of a country trillions of dollars in debt who is also tasked with making real decisions about unsustainable entitlement programs, the high likelihood that states will soon default, 10 percent unemployment, crippling new taxes and inflation on the horizon, a global war against jihadists whose mass-murder attacks  and their catastrophic costs  are impossible to predict, the imminence of game-changing nuclear capability in a revolutionary jihadist state that has threatened to wipe Israel off the map and whose motto is "Death to America," aggression from other hostile nations, a judiciary that is steadily eroding popular self-government, and a host of other actually pressing problems.

April 22, 2010

The Housing Crisis Is an Employment Crisis

The number of foreclosure notices in Rhode Island rose 9.2 percent in the first three months of this year compared with 2009, RealtyTrac Inc. said Thursday.

The Irvine, Calif.-based real estate tracking firm said one in every 242 homes in the Ocean State received a foreclosure notice in January, February or March. ...

Nationally, RealtyTrac said 1 in every 138 homes received a foreclosure notice during the first quarter, up 16 percent from a year earlier and up 7 percent from the prior quarter.

One difference, locally, is that Rhode Island's foreclosures actually decreased from the fourth quarter of 2009, while that number nationwide is up. By any measure, though, it seems relevant to predict that the housing market will continue to be a perilous place until people are working again, and that includes a bit of a shift of leverage back toward employees, whose employers will have to worry, once again, that they'll be able to go elsewhere if they're not happy.

Surely, some folks were supplementing their income with real estate equity, so even their jobs were insufficient, previously, and also surely, some people are walking away from housing purchases that aren't now worth as much as they paid. I still think, however, that people will pay their mortgages when they can, so solving the housing crisis will require solving the employment crisis.

Unless, of course, the federal government proclaims a right to own a home and steps in with more Chinese money from the future to pay off consumer loans.

April 20, 2010

Economic Prognostication and What Ifs

Justin Katz

It's certainly becoming interesting to watch the intellectual right discuss whether the economy is actually recovering. The emerging consensus appears to be that some economic indicators look healthy, but that they aren't built on long-term, sustainable flows of resources. Even in an essay titled "Warranted Pessimism," Stephen Spruiell suggests that the economy may manage to lope along for a while, but:

In a must-read piece titled "The Origins of the Next Crisis," financial analyst and writer Edward Harrison explains the consequences of basing a recovery on endless rounds of monetary and fiscal stimulus. We are pursuing "low-quality growth," he writes, characterized as growth that is underpinned by debt and consumption rather than savings and capital investment. Now that businesses and especially households are maxed out, we find ourselves in a balance-sheet recession. The government has decided to deal with this by transferring the burden to the taxpayer. ...

Eventually, ... even the U.S. will discover that there is a limit to how much it can borrow and print  a point at which debt revulsion (creditors' unwillingness to lend to us at cheap rates) will make future borrowing cost-prohibitive. The conservative case against Obamanomics must start and end by emphasizing that we are closer to reaching this point than most people realize. In the meantime, any economic recovery we experience will be weaker than it would have been had Obama taken a different approach  one that required more short-term pain but offered a more stable long-term outlook.

Since the beginning of the recession, I've been arguing that, for an economy to recover, it needs somewhere to go  whether that means some new technology, some new consumer or worker market, or some new source of capital. The boom of the '00s thrived on capital from the future (i.e., debt); before that, the Internet emerged as a new technology for which consumers and businesses were willing to free up savings, take on additional debt, and put in additional labor.

Now that individuals and private entities have shied from debt, the government has picked up its own pace, gambling that something more sustainable will emerge. Ideologues are praying that it will be "green technology," but that's not really a new concept, and it's not something for which most folks are willing to pay substantial premiums.

The difficulty of prognostication is that something may indeed emerge. Only the few fortunate folks about to become billionaires can say what it is (if it is), but it may be hovering out there, about to break, and it even could be that all of this debt is enabling its continued development.

But it may not emerge, in which case the government is pushing the plane toward the cliff with the hope of kick-starting it before reaching the edge. I'd prefer a safer bet. And I'll believe in the recovery when Americans are working again, hopefully having learned their lesson, paying of debt, and preparing for the future.

April 12, 2010

The Boom... Before the Bust?

Justin Katz

Larry Kudlow suggests that Republicans shouldn't let political enthusiasm lead them to deny economic reality, especially an economic reality that benefits the United States:

Sometimes you have to take out your political lenses and look at the actual statistics to get a true picture of the health of the American economy. Right now, those statistics are saying a modest cyclical rebound following a very deep downturn could actually be turning into a full-fledged, V-shaped, recovery boom between now and year-end. Conservatives shouldn't trash it.

The problem for conservatives, rhetorically and politically, is that we're correct about the effects of the policies being forced into law by Obama and the Democrats (on skids that Bush and the Republicans greased, to be sure). But:

... most of that is in the future. The current reality is that a strong rebound in corporate profits (the greatest and truest stimulus of all), ultra-easy money from the Fed, and some small stimuli from government spending are working to generate a stronger-than-expected recovery in a basically free-market economy that is a lot more resilient than capitalist critics think.

Ultimately, what shouldn't be forgotten is that the United States is made up of millions of people determined to improve their lives, and they'll make the economy as resilient as they can for themselves, given the playing field that they're given. The challenge is in getting America to plan ahead  to look down the road and anticipate the effects that changes to that field will have a year to a decade in the future.

Of course, Kudlow thinks that might be precisely the incentive to which economic actors are currently responding:

At this point it's impossible to project a long-lived economic boom, such as we had following the deep recession of the early 1980s. For one thing, tax rates will rise in 2011 for successful earners and investors, quite unlike the Reagan cuts of the 1980s. So it's possible that entrepreneurs and investors are bringing income, activity, and investment forward into 2010 in order to beat the tax man in 2011. This would artificially boost this year’s economy, stealing from next year’s economy.

Indeed, that's precisely what we've all been arguing: that stimulus spending has only borrowed money from the future and obviated the repair of economic problems in the present, that low interest rates and high government borrowing will yield inflation and a decrease in economic stability based on U.S. fiscal reliability, and that economy killers like the healthcare legislation will vaporize future growth opportunity. Week-by-week trends aren't but so useful, but I do wonder whether this result is evidence that the boomlet that Kudlow predicts represents an investment decision, rather than true economic growth:

The number of newly laid-off workers seeking unemployment benefits rose last week, a sign that jobs remain scarce even as the economy recovers. The Labor Department said Thursday that first-time claims increased 18,000 to 460,000 in the week ended April 3.

For those thousands of people, and tens of thousands more, what's needed is an increase in opportunity as soon as possible. It would certainly be unfortunate, for the long-term health of the nation, if the Democrats managed a bit of luck in a temporary upswing just before an election, but talking down the economy in the present will accomplish nothing positive.

April 3, 2010

What Mileage Rules May Not Mean

Justin Katz

The Newport Daily News headline for this AP report pretty well captures the spin and points to the possible problem: "New mileage rules will save drivers at the pump."

The rules will cost consumers an estimated $434 extra per vehicle in the 2012 model year and $926 per vehicle by 2016, the government said. But the heads of the Transportation Department and Environmental Protection Agency said car owners would save more than $3,000 over the lives of their vehicles through better gas mileage.

One would normally expect, as demand goes down, that prices would go down as well, owing to competition, but I'm not so sure that will be the case with a permanent reduction in the amount of fuel that people need for their cars. "Need" is the operative word, there. It takes a certain amount of infrastructure and investment to move gasoline from the ground to the pump, and since it's not a product that consumers will be able to go without, even with better gas mileage, providers may adjust prices upwards to make up the difference.

March 19, 2010

Conservatives, Bubbles, and Business

Justin Katz

A quick note on conservatives' view of businesses appears to be in order.

In general, we do not believe businesses are inherently pure, moral actors. We do not look at the housing bubble and the derivatives market and defend them on the grounds that they were legal, so nyaa, nyaa, the CEOs got away with it and everybody else is obligated to pick up the pieces.

Rather, we see business leaders as behaving rationally (if badly) within the environment that they are given. We observe that the function of government regulations is essentially to reduce people's fear of risk and volatility, as is the implicit taxpayer support for government-originated economic backstops, like Fannie Mae and Freddie Mac.

Libertarians can make a persuasive case that society will come up with other mechanisms for reducing risk in the absence of government involvement, but if you're going to have regulations, they've got to function, and over the past decade, they failed. Indeed, many of us consider such failure to be inevitable, as the human traits of greed and self-interest infiltrate both government and business.

The appropriate response, given those observations and assumptions, is clearly not to increase the depth of partnership between political forces and economic forces, which will thereafter merely conspire to better hide bubbles and pawn off the consequences to the rest of us when they explode. In the meantime, the culture itself must not absorb and normalize the recklessness and self-interest that has been on display among the powerful.

March 16, 2010

What Now? Social Security Debt Due

Justin Katz

So, the federal government has deficits as far as the eye can see and higher than the Statue of Liberty. What could we layer on top of that? How about the Social Security "trust fund" debt that's now coming due?

... This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes  nearly $29 billion more.

Sounds like a good time to start tapping the nest egg. Too bad the federal government already spent that money over the years on other programs, preferring to borrow from Social Security rather than foreign creditors. In return, the Treasury Department issued a stack of IOUs  in the form of Treasury bonds  which are kept in a nondescript office building just down the street from Parkersburg's municipal offices.

I've long said that I don't expect ever to collect a penny of Social Security, in part because the federal government's schemes for taking money now with no real plan to pay it back makes Bernie Madoff look like a dabbler. This could be the century that our society finally must learn the error of its progressive ways, or it could be the century of our collapse.

March 15, 2010

Laying Planks into the Chasm

Justin Katz

Almost since the recession began, I've been wondering out loud what was going to pull us out of it  what unexplored industry, what as-yet-stagnant market, what boom. In the intervening months, it's been clear that the Obama administration's strategy has been to prop up the public sector (i.e., insulate government from the downturn), flood some borrowed money into the economy, and hope that the private sector would stumble onto something, as it has proven so proficient at doing. But anybody who's spent a decade or so, after college, without that magical high-paying job that's supposed to appear when you take all the right steps and do good work has learned to look for incremental steps, and I'm just not seeing those steps for the economy.

Anthony Randazzo goes so far as to call the currently touted recovery a "myth":

... a closer look reveals those appealing numbers sit on a dangerously shaky foundation. Economic growth in 2009 was largely dependent on a historic level of government spending that even the president acknowledges is unsustainable in the long term. The root problem of mortgage delinquencies has yet to be worked out. Bank lending is sparse amid ongoing uncertainties surrounding regulatory reform. As a result, manufacturers and small businesses continue to struggle with limited credit. All that translates into historic job losses and a bleak outlook for meaningful growth in 2010 and 2011.

Worst of all, many of the core problems in the housing, banking, manufacturing, and service sectors are being perpetuated and exacerbated by the very federal programs the president credits with jump-starting economic growth. Instead of confronting the roots of the crisis head on, as Obama has repeatedly boasted of doing, his administration and the Democratic Congress have kicked the can down the road, postponing the day of reckoning for real estate, the auto industry, and the toxic mortgage-backed securities that were at the heart of the economic meltdown. These unsolved problems will keep looming over the economy until they’re finally addressed.

At this point, perhaps the best thing we could do, as a nation, is spin a 180 away from big government. Especially in Rhode Island, going from overburdened to liberated would at least attract the growing market of investors, entrepreneurs, and skilled, motivated workers looking for a sanctuary.

Adding "Green" Does Not Free the Industry of Market Forces

Justin Katz

In the aptly named "Green Jobs and Rose-Tinted Glasses" (subscription required), Iain Murray argues that evidence does not suggest that the "green" subindustry is a windfall just requiring a little initial shaking:

Green jobs, it would seem, are a magic bullet for the administration, solving the problems of unemployment, poverty, com­munity degradation (and therefore crime, presumably), class struggles, public health, terrorism, and global warming at a stroke. What could possibly lead anyone to object to them?

The answer is, as ever for a conserv­ative, real-world experience. Germany and Spain went down the green-jobs road many years ago, for much the same reasons as the ad­ministration. They saw it as a way to make their countries world leaders in coming technologies, provide good jobs to replace decaying industries, and insulate against energy shocks originating overseas.

It didn’t work out that way.

According to Murray, other countries (notably China) undercut Germany's production prices, even as the country continues to import most of its energy in the form of Russian natural gas, all without having contributed to job growth, once the jobs lost to higher energy costs are taken into account. In Spain, the green industry has lost jobs, and the government has reduced subsidies.

Of course, the United States has been picking up some of that slack. Murray notes that hundreds of millions of American tax dollars have slipped across the Atlantic as "green energy" investments to the Spanish company Iberdrola:

And Iberdrola isn't the only foreign recipient. According to a report from the Watchdog Institute, there are plenty of countries that received stimulus cash to create green jobs, but created plenty overseas and few or none here. Most of the jobs that were created here were temporary. Despite all the stimulus money, the Amer­ican wind industry lost permanent manufacturing jobs (while creating temporary construction jobs) last year, because de­mand for over-expensive energy plum­meted (without the stimulus money, the in­dustry would likely have collapsed).

It ought to trigger suspicion when massive money giveaways are justified with miraculous promises, and that's one area in which "green jobs" have led the field.

March 14, 2010

Senator Sheldon Whitehouse: Unemployment is Very, Very Serious. So What We Need to Do is Legalize 12-20 Million Additional Workers.

Monique Chartier

[A constituent contacted Senator Whitehouse to express concerns about the rate of unemployment in the United States and efforts at immigration reform pending in Congress. Following is the Senator's reply.]

Thank you for contacting me with your concerns regarding America's immigration system. I appreciate hearing from you regarding this very important issue.

I understand your concerns regarding the level of unemployment in the United States, and agree with you that we must stimulate the economy by providing jobs for Americans. While some guest workers may be needed in very specific circumstances, the guest worker visa program should never be used to displace American jobs. As you know, the unemployment rate in Rhode Island is now among the highest in the nation, a staggering 13.0 percent. The anemic economy has affected thousands of Rhode Islanders who are struggling to pay their mortgages, heat their homes, and keep up with the rising costs of healthcare and prescription drugs. At a time when jobs are hard to find, our utmost priority should be the hiring of American workers.

Congress must pass comprehensive legislation that provides for strong enforcement at our borders and worksites, establishes a means for regulating the flow of immigrants into this country, and copes with those who are already in America illegally. Strong enforcement of our laws against the hiring of illegal aliens must be part of this equation, but we can no longer allow millions to live in the shadows of our society either. Rather, I believe in requiring illegal immigrants to regularize their status by paying fines and back taxes, holding down a job, passing a criminal background check, and learning English and civics.

The right answer is not to incarcerate and deport tens of millions of people. As a former federal prosecutor, I know from experience that this plan would be costly and impossible to implement, requiring an expansion of our federal prison and justice systems by as much as 60 times. Although there is disagreement on how to balance all these competing objectives, there is little disagreement that action is necessary. It is my hope that with the cooperation and leadership of the Obama Administration, we can arrive at a consensus approach to fixing our broken immigration system.

Majority Leader Reid introduced S. 9, the Stronger Economy, Stronger Borders Act of 2009 at the outset of the 111th Congress, but we do not know yet the details of what this legislation would entail. Senator Reid's bill states that its purpose is to strengthen the U.S. economy, provide for more effective border and employment enforcement, prevent illegal immigration, and reform avenues for legal immigration. I look forward to working with the Obama Administration and my colleagues in the Senate in crafting sensible, effective legislation to fix our broken immigration system. As I work on this important issue, please know that I will keep your concerns in mind.

Again, thank you for contacting me. I hope you will continue to keep me advised of your thoughts on any issues of concern to you.

March 11, 2010

I Wonder Why these Virginia 'Burbs are the Richest Counties in U.S. ?

Marc Comtois

Yesterday I mentioned the report that federal employees make more than private employees in most occupations. Now we learn that 6 out of the 10 wealthiest counties ( and 11 of the top 25!) are suburbs of Washington, D.C.

Rank

County

Population

Median household income

1

Loudoun County

277,433

$110,643

2

Fairfax County

1,005,980

$106,785

3

Howard County

272,412

$101,710

4

Hunterdon County, N.J.

129,000

$100,947

5

Somerset County, N.J.

321,589

$100,207

6

Fairfax City

23,281

$98,133

7

Morris County, N.J.

486,459

$97,565

8

Douglas County, Colo.

270,286

$97,480

9

Arlington County

204,889

$96,390

10

Montgomery County

942,747

$93,999

There hasn't been a recession in D.C. John Derbyshire has been saying for a few years now that the only way to guarantee not only all-around security but also a pretty nice, upper-middle class living for your family is to get a government job. Looks like he's right.

March 10, 2010

Comparing Public and Private Occupational Pay

Marc Comtois

USA Today recently published a story regarding their analysis (utilizing Bureau of Labor Statistics data) of the pay differential between similar jobs in the public and private sector. According to their study:

Overall, federal workers earned an average salary of $67,691 in 2008 for occupations that exist both in government and the private sector, according to Bureau of Labor Statistics data. The average pay for the same mix of jobs in the private sector was $60,046 in 2008, the most recent data available.

These salary figures do not include the value of health, pension and other benefits, which averaged $40,785 per federal employee in 2008 vs. $9,882 per private worker, according to the Bureau of Economic Analysis.

March 9, 2010

Taking the Discouraged into Account

Justin Katz

Back when I made my (thus far) erroneous prediction that Rhode Island's unemployment rate would hit 14 or even 15%, I didn't take into account the effects of discouraged workers. Doing so, the rate would actually be much higher than that.

It is, without a doubt, a confounding variable, which is why I'm not so sure that this statement can be considered to be accurate:

Forecasters say a larger work force is a positive sign in that it shows that formerly discouraged workers who had given up searching for work are confident enough in the job market to start looking for employment again, even if it takes time to find it.

Put aside questions about the encouragement that we ought to take from the impressions of discouraged workers about the prospects of the economy. I've seen no evidence in print or in life that such confidence in the job market is actually a factor.

It seems more plausible, to me, that "discouraged workers" are seeing their allotted time of unemployment benefits running out and are therefore redoubling their efforts. If that's the case, then one effect of extended jobless payments has been to temporarily shrink the workforce, which is arguably a good thing in the short-term, although the long-term effects of taking that money out of the economy and habituating people to not working may swamp any advantage.

It may also be the case that spouses and children are entering the workforce because the primary household earner has been having such trouble. In other words, an increasing workforce, in the current economic circumstances, could be either a good sign or a bad one.

March 6, 2010

Long-Term Unemployment, Private Sector Only

Justin Katz

By now, you've likely decided whether or not you agree with the statement that the Obama administration's approach to "stimulus" was meant not so much to stimulate growth in the private sector economy as to shore up the public sector and insulate government at all levels from the real effects of the recession. Whether the private sector will begin to grow again of its own accord and bail out the borrowing of the public sector remains to be seen.

George Mason University Economics Professor Alex Tabarrok is specifically worried about the bifurcation of the workforce:

... I am more worried, however, about the long term consequences of creating a dual labor market in which insiders with government or government-connected jobs are highly paid and secure while outsiders face high unemployment rates, low wages and part-time work without a career path. ...

Moreover, once an economy is in the insider-outsider equilibrium it's very difficult to get out because insiders fear that they will lose their privileges with a deregulated labor market and outsiders focus their political energy not on deregulating the labor market but on becoming insiders ...

Once again, we in Rhode Island have an especially relevant perspective on the direction in which the country is now headed, inasmuch as we've tested the waters, found them frigid, and continue to beckon in the other states anyway. We're well accustomed to arguments that the problem is that public-sector union jobs kept up with inflation while private-sector employment did not, and that we shouldn't respond to the latter by bringing down the former. We've all heard the "I got mine" responses that lie behind all related debates with supporters of public-sector unions.

It can be disorienting how quickly the very same advocate can switch from proclamations about fairness to denials that inequitable balances in the pay and benefits matter for measuring government employment packages. All we can do is stiffen our jaws and patiently explain that the objective isn't to tear down the publicly backed segments of the middle class; it's to prevent financing that group from strangling the economy that ultimately must support it.

March 4, 2010

Time to Make the Necessary Policy Shift on Jobs

Justin Katz

Kentucky Republican Sen. Jim Bunning's hold-up of unfunded government spending has ended, and probably without the lesson learned, although coverage of the effects did point the way:

Unemployment benefits will begin phasing out for thousands of out-of-work Rhode Islanders starting Monday, the result of Congress’ failure to pass a temporary benefits-extension bill late Thursday night.

Another result is that about 2,000 unemployed people will run out of benefits altogether between now and late July, state Department of Labor and Training officials said Friday. ...

Thus, instead of being potentially eligible for up to 99 weeks of benefits overall, they will generally be capped at 46 weeks, Hart and Filippone said.

Why are we considering it tolerable that Americans are requiring unemployment benefits for almost two years? And how much longer should we attempt to sustain such spending before shifting people to a system that's set up for longer-term care? At some point, it ceases to be unemployment and becomes welfare.

Rhode Island employers will have to pay an extra $39 million in unemployment tax next year, a side effect of the state’s high jobless rate. ...

The tax increase will come as employers continue to struggle amid a nagging recession. It will be in addition to the high unemployment taxes they now pay, said Grafton H. "Cap" Willey IV, co-chairman of the Rhode Island chapter of the Smaller Business Association of New England, an advocacy group for small business. "It's a tremendous burden," said Willey, who is also a managing director of CBIZ Tofias, a CPA firm with offices in Providence and Newport.

At issue is a tax that employers must pay to the state unemployment insurance trust fund, which in turn pays benefits to out-of-work Rhode Islanders. As the jobless rate has climbed, demand for benefits has risen, draining the fund. As a result, the fund has been borrowing from Uncle Sam for the past year to help cover benefit payments.

The longer this goes on, the more difficult it will be, because the burden of the debt will grow precisely on those who need it to be relieved in order to get the economy rolling again. As we've watched, in Rhode Island, for most of the past decade, government officials are merely trying to maintain the status quo while awaiting some miraculous change that will fix their problems. It doesn't work that way.

The money to cover unemployment benefits must come from somewhere other than employers, and it must not initiate new taxes. In other words, the governments of Rhode Island and of the United States must lay their expenditures out across the table and divvy up the shrinking revenue as well as they can, prioritizing economic growth. They must also take the much less financially difficult step of loosening the chains that they've laid upon the various industries, from farming to healthcare.

Government officials won't take such steps, though. In Rhode Island, they're too myopic to look beyond their own standing. At the federal level, the Democrats are trying to shove as much of their long-term agenda into law as they can, and any policy disruption will have to wait, even if it continues to translate into economic depression.

February 25, 2010

From the Garden to the Ocean

Justin Katz

One must suspect that Ed Achorn is link-seeking when his column addresses both state-government dependents and the state of my youth, New Jersey:

Ultimately, while the public-employee unions and other government-fed special interests keep fattening up, the middle class suffers from a loss of jobs and opportunity, and the poor suffer from a loss of charitable dollars. The quality of life goes down, as money to pay for vital government services disappears, leaving a state with poor roads and bridges, aging school textbooks, leaking roofs and canceled sports programs, while the politically connected demand the same plush benefits they have long received.

In the comments to my Sakonnet Timesletter, a teacher is claiming that he can't possibly survive with a 5% cut. The disconnect from what the rest of us have been experiencing is palpable. There's just not much more my family can cut from its budget, and nothing more we can trim and still justify living in a state that won't recover from its economic slump for years to come.

We have to turn things around quickly, in Rhode Island, because the downward spiral is self-propelling; the faster it goes, the faster people will leave, and the faster it will go. It isn't a matter of whether public-sector employees can afford a cut. If current trends continue, the cities and towns and the state will find it more difficult to pay them every year.

February 24, 2010

The Teetering Globe

Justin Katz

We've been watching, almost since the start of the recession, as economists have insisted that recovery was just on the horizon. Why? Well, because it always is. If they could tell us what the engine would be, they'd be investors, not economists, and hey, nobody can predict the future.

Bass could be wrong on Japan. The island nation (and the world's second-largest economy) has defied skeptics for so long that experienced traders call betting against it "the widowmaker." But he may be right on the bigger picture. If 2008 was the year of the subprime meltdown, 2010, he thinks, will be the year entire nations start going broke.

The world has issued so much debt in the past two years fighting the Great Recession that paying it all back is going to be hell--for Americans, along with everybody else. Taxes will have to rise around the globe, hobbling job growth and economic recovery. Traders like Bass could make a lot of money betting against sovereign debt the way they shorted subprime loans at the peak of the housing bubble.

National governments will issue an estimated $4.5 trillion in debt this year, almost triple the average for mature economies over the preceding five years. The U.S. has allowed the total federal debt (including debt held by government agencies, like the Social Security fund) to balloon by 50% since 2006 to $12.3 trillion. The pain of repayment is not yet being felt, because interest rates are so low--close to 0% on short-term Treasury bills. Someday those rates are going to rise. Then the taxpayer will have the devil to pay.

So what's coming our way, in 2010  recovery or global bust? It's a frightening predicament, especially with Tin-Ear Barack still pushing federal takeover of healthcare and promoting government as the nation's job engine. My federal tax return finally enabled me to catch up on bills that were months overdue. If things hover as they are, my family will weather the storm for a while longer. If they don't improve, who knows. The boss has said layoffs are coming on Friday, and the town, state, and country in which I live are run by people without the economic knowledge or political will to take necessary steps.

February 20, 2010

Narrow Foreclosure Improvement, Broad Decline

Justin Katz

In order to interpret trends in mortgage payments, one must look at the overall movement, and I'm not sure the content of this article by Paul Edward Parker merits the the talk of recovery that the front-page headline initiates:

In Rhode Island, the association reported that 11.09 percent of all mortgages were one or more payments behind in the fourth quarter. That’s an increase from the third quarter, when 10.25 percent were behind. ...

But those numbers break down to show a substantial increase in the mortgages three or more payments behind and a modest decrease in those only one payment behind.

Mortgages three or more payments behind went to 5.41 percent in the fourth from 4.45 percent in the third quarter. At the same time, those one payment behind fell to 3.82 percent from 3.93 percent.

Comparing the two quarters, both the total number of mortgages in foreclosure at the end of the quarter and the number that entered the foreclosure process during the quarter dropped.

The number in foreclosure fell to 3.97 in the fourth quarter from 4.05 percent in the third quarter.

Those starting the process fell to 1.15 in the fourth quarter from 1.34 percent in the third quarter.

There are two significant gaps in information, here: First, we don't know what percentage of Rhode Island mortgages are two months delinquent. Second, states, banks, and individual agreements and circumstances vary the number of months that the average homeowner can fall behind before entering foreclosure, and I don't know whether the cited percentages continue to count folks in foreclosure as still being delinquent. (The report itself is way too expensive to justify satisfying my curiosity.)

That noted, the reality is that a borrower must be one payment behind before being multiple payments behind, so the above data suggests a plateau, at best... rather, it suggests an approaching plateau, at best. Overall, an additional 0.84% of all mortgages fell behind in payments, from the third quarter to the fourth quarter. Putting the trends in order, the percentage of all mortgages at one payment delinquency dropped 0.11 points; the percentage three or more behind increased 0.96 points; the percentage entering foreclosure fell 0.19 points; and the percentage actually in foreclosure fell 0.08 points.

Assuming that foreclosures and payments in full haven't wiped out so many mortgages as to affect this data substantially, since the total number of delinquencies went up while the one-month category decreased, delinquencies can only be moving in the wrong direction. People aren't catching up on their payments, they're falling farther behind. The decrease in both new foreclosures and total foreclosures could mean two things, neither of which indicates a recovery: banks could be allowing longer delinquencies before initiating foreclosure or the market is simply between two waves of them.

The ideal trend would be to see an overall decrease in delinquencies at the same time as the number of households that are one payment behind goes up. That would mean that folks are making headway against the hard economic times. Of course, it would also mean that more people are working and making more money, and we'll have evidence of that before the mortgage market tells us anything of note.

February 13, 2010

Hurting a Dedicated Constituency

Justin Katz

In an article about the ways in which Democrats' preferred policies hurt black Americans, Kevin Williamson emphasizes union racism and especially the minimum wage:

THE first answer many economists will give to that question is: the minimum wage. Milton Friedman, a Nobel laureate who spent much of his career showing how government programs reliably end up hurting those they are intended to help, was scathing on the subject, calling the minimum wage "one of the most, if not the most, anti-black laws on the statute books." And he's not alone: Acongressional survey of economic research on the subject, "50 Years of Research on the Minimum Wage," has a string of conclusion lines that read like an indictment, the first three counts being: "The minimum wage reduces employment. The minimum wage reduces employment more among teenagers than adults. The minimum wage reduces employment most among black teenage males." Other items on the bill: "The minimum wage hurts small businesses generally. The minimum wage causes employers to cut back on training. The minimum wage has long-term effects on skills and lifetime earnings. The minimum wage hurts the poor generally. The minimum wage helps upper-income families. The minimum wage helps unions." Helping the affluent and high-wage union workers at the expense of the young, the poor, the unskilled, and small businesses: That amounts to a lot of different kinds of injustice, and it also amounts to a wealth transfer from blacks to whites. ...

And it's not just that the minimum wage prices some low-productivity workers out of the labor market: It's that it prevents entry into the labor market in the first place for the most marginal would-be workers. If Will the candy hustler's real economic output is worth $6.67 an hour, his implied wage on the subway, he's unemployable with a $7.25 minimum wage. He can sell candy on the subway, but he can't sell candy for Big Candy Corp., make connections, learn what it's like to go to an office every day and have a boss, get references, get promoted, and sign up for the tuition-reimbursement program. And that, not the paltry lost income of a minimum-wage job, is the price he pays. Very few American workers actually earn the minimum wage--about 1 percent, in fact--but the minimum-wage job is a gateway into the labor force for many young workers. The value of your first job isn't the money you earn from it: It's your second job, and your third. With the right experience and network, a candyman like Will can do well for himself. But without that first job, he has a much higher chance of becoming a statistical blip on the long-term unemployment charts than a middle manager at Hershey or a salesman at Cadbury.

Perhaps for reasons of length, Williamson doesn't even touch on the deleterious effects of liberal social programs (from the welfare state to easy divorce to abortion on demand) and extra-statutory principles (like identity politics) that have destroyed family structures in minority communities. If the Ku Klux Klan had called grand meeting in the middle of the last century to contrive a national conspiracy that would effect long-term evisceration of blacks' progress, the bigots could hardly have done so more effectively than the American Left.

February 10, 2010

Training for Jobs That Will Never Come

Justin Katz

A lot of people are pinning their hopes to the emergence of a "green economy," but wishing won't make it less of a fad:

Although it offers general optimism about the green sector, the state plan does not say how large the industry could be in Rhode Island or how many jobs it could create. The New England Economic Partnership, however, issued a report in November that projected the green economy would not be a major engine of growth in Rhode Island and the region in the immediate future. That report cited a study by the Pew Charitable Trusts that found only about 2,300 green jobs in Rhode Island in 2007.

The major difference between "green" and other revolutionary developments is that it doesn't create anything new. The Internet was an entirely unexplored public square and marketplace. Green energy is, well, energy. It doesn't do anything that regular old energy doesn't do, and the only thing "new" that it offers is a chance for everybody along the line of its production and usage to feel as if they're helping the environment. If there's any price differential at all, few people are going to seek out green.

The Providence Plan, a local nonprofit focused on socioeconomic advancement, will launch a jobs-training program next month geared at getting low-income city residents trained in the energy-efficient construction and renewable-power industries.

Thanks to a $3.7-million grant from the federal stimulus plan, the Providence Plan will be able to expand Building Futures, the agency's program helping urban residents prepare to enter apprenticeships in carpentry, electrical work, welding, plumbing and other construction trades.

Training low-income, under-skilled people for work of any kind is a positive good of itself. But construction has been among the most receding industries in the state, and if the "green" thing doesn't pan out, there will be even more workers chasing even fewer jobs.

From where I sit, the situation appears to be one in which activists, politicians, and invested private business interests are pushing to use public money to create an industry segment for ideological and financial reasons. They're using public money because the private money is not there, and if their gamble doesn't yield rewards, the consequence will be paid by the working class in suppressed wages.

February 8, 2010

State Exceptions to Unemployment

Justin Katz

Owing to some legislation put forward by union-friendly state Senator John Tassoni (D, Smithfield, North Smithfield), I've been poking around state law related to unemployment insurance. Tassoni's bill would remove the word "private" from the following paragraph related to the state's workshare program:

"Eligible employer" means any private employer who has had contributions credited to his or her account and benefits have been chargeable to this account, and who is not delinquent in the payment of contributions or reimbursements, as required by chapters 42 – 44 of this title.

The obvious question is why public employers wouldn't be eligible for this program in the first place, and I can't say that my digging has led me to an answer. It has, however, unearthed a peculiar exemption. Government employers don't have to make regular contributions to the unemployment trust fund and can instead reimburse the fund for benefits paid to laid-off employees. Why should that be allowed?

My understanding is that employer payments into the fund are invested (assuming a positive balance) and are not reimbursable upon the closing of the business. When a particular employer lays off workers, its payment rate goes up (in the same way that auto insurance goes up after an accident or ticket), and when the fund is low, employers have to pay more in order to build it back up. Public-sector employers that make pay-as-you-go reimbursements to cover executed benefits do not contribute to the body of money that earns investment returns, and since they don't make regular payments, they would not pay more no matter how many employees they lay off or how low the fund might be.

This doesn't appear to be relevant to Tassoni's bill, however, because it would still only apply to an employer that has "contributions credited to his or her account." The new question is therefore what proportion of public employers make contributions, and the previous question about the reason for their initial exclusion from the workshare program remains.

Of course, the issue of more general concern is why the state's largest employer  i.e., the state and its subsidiaries  wouldn't have to participate in a program that is ostensibly set up to spread employment risk.

February 7, 2010

Further Thoughts on Economic Up Is Down

"It's very unusual," said Mark Zandi, chief economist at Moody's Economy.com. "At this point in the business cycle, we should be seeing some sort of labor force growth. Layoffs have abated, but there really has been no pickup in hiring."

Job creation was stronger early in previous recoveries. And jobless people responded by streaming back into the labor force. Some workers are concluding it's more practical to return to school, start a business or care at home for their kids until the job market improves. In some cases, it even makes financial sense to stop looking for work.

As I've been saying for some months, the wealth to fund a recovery must come from somewhere, whether an innovative technology creates a new market, geopolitical changes open up existing markets, changes in taxation and regulation free up wealth or productivity that had previously lain fallow, or money is borrowed from the future. It would be fair to summarize, I think, that the housing boom essentially borrowed money from the future, and the bust erupted when it turned out that the future money didn't actually exist.

What economic growth is currently occurring may be based entirely on the the resources that the federal government is pumping from the future into the economy, propping up public sector workers and favored industries, even favored businesses. In this scenario, jobs might not be increasing because the market isn't really expanding. There's no need to hire people when the uptick in profits derives from a government handout; there's really not much work to be done in claiming it.

Meanwhile, people are rearranging their lifestyles, effectively taking themselves  and the wealth and productivity that they represent  out of the economy, and businesses are responding to necessity by finding ways to increase productivity without new workers. That means jobs and workers that aren't coming back... at least until people begin to believe in "must have" goods and services again.

The contraction that the government borrowing seeks to disguise will continue, and eventually people will realize that the future wealth is not what everybody has been pretending it would be.

Economic Up Is Down

Justin Katz

Do you think there comes a point at which people simply stop listening to measurements? As the latest national unemployment numbers rolled out, one certainly got the impression that the news was positive, that recovery is just around the corner. Yet:

U.S. payrolls unexpectedly fell in January, but the unemployment rate surprisingly dropped to a five-month low, according to a government report Friday that hinted at labor market improvement. ...

While a sharp increase in the number of people giving up looking for work helped to depress the jobless rate, some details of the employment report were encouraging. The number of "discouraged job seekers" rose to 1.1 million in January from 734,000 a year ago.

The storyline is becoming repetitive. It seems that every time the unemployment numbers drop, lately, it turns out to be a result of discouraged people giving up. In this case, the Reuters reporter is downright confusing. Increasing numbers of "discouraged job seekers" represent an "encouraging detail"? Of course not, but it's as if one can read right through the text and see the will to spin behind it.

February 5, 2010

Drinking from the Lowest Shelf

Alright, so it's not the most compelling or sympathetic example, but this is as good an instance as any of the ways in which middle-class-and-down Americans translate money (especially taxes):

Americans' love affair with top-shelf booze cooled last year as the recession took a toll on high-priced tipples.

A new report by an industry group shows people drank more but turned to cheaper brands. They also drank more at home and less in pricier bars and restaurants.

As I walked out of last year's financial town meeting, in Tiverton, having just played a visible role in a budget-cutting coup, the air was thick with comments snidely dismissing the amount of money that the average household would save. Perhaps to step-10 teachers, another night out each year is a sneer-worthy inconsequentiality, but to folks who only splurge for one a year, it's not so minor. For those who never go out, the same amount of money translates into small luxuries like egg sandwiches on Wednesday mornings or a more palatable brand of rum.

February 2, 2010

More Economic Poison Presented as Medicine

Spelling out painful priorities, President Barack Obama urged Congress on Monday to quickly approve a huge new shot of spending for recession relief and job creation, part of a record $3.8 trillion budget that would boost the deficit beyond any in the nation's history while only slowly beginning to put Americans back to work.

If Congress goes along with Obama's election-year plan, the nation would still end the year with unemployment pushing double digits at 9.8 percent and this year's pool of government red ink deepening to $1.56 trillion under the administration's accounting.

The spending blueprint for next year calls for tax cuts for workers and business and more aid for cash-starved state governments as well as the unemployed. The jobs initiative largely mirrors last year's stimulus bill, but is about one-third its size. The president is asking for nearly $300 billion for recession relief and job stimulus.

Does the administration really think the last stimulus bill worked? Or does it really think that the American people think it did? Or is President Obama so ideologically rigid that he can believe that no other strategy exists?

With every public statement, I suspect more Americans move past the point of hoping that the president will learn in office, which is tragic, because he didn't give the impression of knowing very much before he entered it.

January 23, 2010

Again: It Wasn't Stimulus; It Was a Government-Insulation Program

Justin Katz

We've argued multiple times, 'round here, that the federal government's approach to "stimulus"  especially as defined by President Obama  was not, in fact, designed to stimulate the economy and yield job growth. Rather it was designed to insulate government structures from the effects of an economic recession... at the expense of the economy. In case you missed it, here's one more bit of evidence from recent weeks:

A federal spending surge of more than $20 billion for roads and bridges in President Barack Obama's first stimulus has had no effect on local unemployment rates, raising questions about his argument for billions more to address an "urgent need to accelerate job growth."

An Associated Press analysis of stimulus spending found that it didn't matter if a lot of money was spent on highways or none at all: Local unemployment rates rose and fell regardless. And the stimulus spending only barely helped the beleaguered construction industry, the analysis showed.

As Rhode Islanders who follow state and local politics should be amply able to attest, such infrastructure money from the feds only serves to take the pressure off lower tiers of government, which tend to neglect obvious, necessary expenditures in favor of less popular, more ideological ones. They typically float bonds and create targeted taxes to accomplish the building and repairs that must obviously be done for the good of the local society, but in the current environment, taxpayers were likely to resist either strategy, requiring governments to cut back on other areas of spending.

The "stimulus" money, in other words, didn't create any new work. It merely enabled continued profligate behavior. And the reason it "only barely helped the beleaguered construction industry" is that the government has instituted policies that create high barriers to entry in order to compete for its contracts, sending the money mostly to companies that were already prepared (and expecting) to receive it.

January 15, 2010

Looking for the "U" in Unemployment

Justin Katz

Rep. John Carter (R, TX) has posted a chart illustrating the depth and time to recovery of various recessions throughout recent U.S. history. The upshot is that the current recession has seen the largest drop in employment since 1948 and has been falling for as long as almost all job troughs have lasted, from start to finish. He goes on:

Unemployment continues to stand at an official 10% for the third month in a row, the worst joblessness in 27 years. The real unemployment rate is far worse. Included in the December economic figures was a shocker  the percentage of adult men who are working has fallen to the lowest level in recorded U.S. history at just 80%. That means that one in five men in this country between 18 and 54 are neither working nor claiming unemployment. They have fallen completely out of the workforce.

That helps explain why December's unemployment rate remained at November's 10% rate in spite of an additional 85,000 Americans losing their jobs. At the same time the new jobless claims were added, many of the previously unemployed were simply removed from the workforce numbers altogether.

And yet the big-government policies continue, with talk of yet more "stimulus" give aways to government workers and the politically connected. Little wonder the "anybody but Obama" ticket is starting to attract so much support.

January 14, 2010

But for a Government Gone Too Far

It's a world gone mad: The Euro-welfarized 'Nucks are hard at work, their wages up 2.3 percent year over year, while the Aussies, who have a 45 percent top rate for personal income taxes plus a 5 percent payroll tax, are booming. But the rugged individualists toiling in the fields of freewheeling American capitalism are suffering Gallic levels of unemployment. How can that be?

Granted, some of the key causes of this recession were unique to the United States, but Williamson suggests that there's something more at play:

There will be no new firms without new investment, and that's the fundamental problem. Investors are terrified. The big guns are worried about the tax hikes that will be necessary should Obamacare pass, about new regulatory burdens like cap-and-trade, and, most of all, about the apparently boundless jurisdiction of Washington meddlers who have arrogated unto themselves the authority to micromanage every nut and bolt of the economy, from the design of cars to the size of Wall Street traders' paychecks. Individual investors are feeling the continued pinch of the recession and, rather than pouring money into their 401(k)s, are paying down consumer debts and thinking about rainy days. ...

One surprising finding: It's not the size and expense of government alone that has sent the United States downward in the economic-freedom rankings--it's corruption. "We're not talking here about outright bribery or petty corruption," Miller says. "It's the perception that the United States has a political system that is about rent-seeking and dispensing favors. Canada and Australia have different electoral processes, and very disciplined party structures, so they have less of that. It may not be illegal, but this kind of political bribery, with people buying access and Washington picking winners and losers, creates a perception about the U.S. that shows up in these corruption scores."

The supposed experts keep predicting that things will return to normal in X number of months, but a great number of us laypeople fear that President Obama really did accomplish change... just not a change that voters would have wished on themselves. In the context of the War on Terror, Mark Steyn recently called the election of Barack Obama "a fundamentally unserious act by the U.S. electorate." The description applies in the area of the economy, as well.

Big government is a burden on investment and economic growth, but if its rules are predictable and the burden calculable, it's just an accepted moderation of profits absent a better opportunity. For decades, centuries, the United States has offered that better opportunity, but we've been busy, recently, illustrating to the world that our form of democracy can be taken over by redistributionists and thieves. That's an image that will take more than a couple of elections to shed. If we shed it.

January 12, 2010

The Great Obaman Recession

The issue is strikingly similar to what the banks face. As we're all aware, the banks are making big money and waiting to pay out bonuses in the coming days. But the cash isn't coming from lending the money out. Instead, the banks are cutting costs, hoarding cash and investing some of it in low-risk bonds.

Businesses are doing the same even if the economy "grows" according to official statistics. Why risk expanding operations and hiring workers amid a wild boom in government that will lead to massive tax hikes when you can make money simply by doing nothing or laying people off?

All of which translates into a jobless recovery -- the economy appearing to grow while unemployment remains unnaturally high -- unless of course, you work in government.

To be fair to the President, he's not accomplishing suppression of the national economy on his own; the Democrats in Congress are playing a large role, too. There's therefore at least some room for hope that a Republican resurgence in the legislature will be a sufficient signal that the era of hopenchange is over. Or perhaps not; the economic paranoia surely derives, in part, from the memory that the Republicans had drifted far from their Reaganite roots over the past decade, leaving no hope of a solid turnaround.

Of course, whatever the case, Rhode Island exacerbates the problem. All the gimmicks, as I've been calling them, are meaningless without large structural change, including an overhaul of elected officials. Businesses needn't even be all that perceptive to fear that the "targeted incentives" that the local Democrats have increasingly been citing as their economic plan are merely a lure into a trap. The people running our state government want businesses here so that they can take their money and transfer it to friends, unions, and government-dependents, not so that their state can return to economic health and opportunity.

January 11, 2010

How the Economy Interacts with the Poor

Justin Katz

As economic units is perhaps the last way in which clergy should consider human beings, but it's worth their while, on prudential matters, to take into account the ways in which economic principles affect charitable intentions. Unfortunately, in the quotation that Ed Fitzpatrick recently utilized, I fear Roman Catholic priest John Kiley has the mechanism reversed:

"When many of our fellow citizens are constrained by unemployment and illiteracy, and even by hunger and disease, the whole society suffers," said the Rev. John Kiley, ecumenical officer of the Roman Catholic Diocese of Providence. "Because of poverty, civilization's greatest resource, the human person, is prevented from sharing his intelligence, his gifts and his uniqueness with the world at large. Thus, mankind's social capital is depleted. Poverty makes poorer persons of us all. The elimination of poverty in Rhode Island over the next 10 years will improve the living standards of all citizens. Elevating the poor will actually enrich the prosperous."

An accurate assessment would find an organic give and take, but if the dominance tilts in one direction or the other, I'd say that it's more true that improving the economy will elevate the poor than the other way around. Prosperous people who increase their charitable giving  and, more generally, behavior  during hard times will certain reap rewards in many ways, but if the suggestion is for society to reallocate funds from the wealthy to the poor by means of government coercion, the economy will slip even farther, and the most vulnerable will wind up being harmed more profoundly and with an increasing number of fellows.

Dependency and the dilution of natural motivators for self improvement can also prevent the human person from growing and sharing. Nothing depletes social capital and human potential more surely than a government with its fingers in everybody's pockets, whether it's taking or giving.

January 6, 2010

RE: Budget Misery - Moderate Solutions

Marc Comtois

Over at the FrumForum (a moderate Republican blog run by David Frum) Eli Lehrer explains:

Many of the biggest budget items for states—Medicaid, bond payments, pension obligations to retirees—are virtually impossible to reduce. Big , broad-based tax increases, although difficult to avoid under many states’ balanced budget laws, will simply discourage investment and growth. Without indulging into liberal (“tax the evil corporations”), moderate (“run government like a business”), and conservative (“cut taxes to increase revenue”/”privatize all education”) fantasies, states looking to balance their budgets aren’t totally out of luck.

He offers six suggestions for balancing budgets, two of which address some familiar problems here in Rhode Island: pension reform and eliminating "special tax abatements and business 'relocation/retention' grants." As to the latter, Lehrer explains:

In efforts to attract new enterprises, revitalize decrepit areas, boost politically favored types of business, nearly all states run massive corporate welfare programs including “enterprise zones,” “TIF (tax increment financing) districts,” “job retention tax credits,” state “HUB (historically underutilized business) zones.” Although a few states simply give grants to private businesses, most of these programs involve issuing bonds, building infrastructure, or granting tax credits that benefit only a particular business or development. The practice produces headlines for politicians but largely serves to let political leaders decide on the location of development that would happen anyway. These business subsidies tend to feed on themselves: cities like Chicago and Syracuse, New York have made such widespread use of them that almost all new development requires some sort of tax abatement or other assistance since unabated tax rates are so high as a result. Although it appears almost certain to cause some short-term pain, many states would almost certainly increase revenue while cutting base tax rates if they simply quit the abatement drug cold turkey. Certain areas, many of them in need of help, probably would lose out. But, in the end, the free market would make better decisions about business locations than central government planners ever could.

As we've argued before, the goal should be to make the state more business friendly in general by lowering taxes and regulatory barriers across the board. This can be accomplished by simplifying and streamlining, not creating a web of loopholes and "incentives" that result in one-off deals benefiting a particular business instead of all.

Budget Misery and the Government Payroll Economy

Marc Comtois

Rhode Island is not alone in facing budget deficits as many other states (if not most) are in the same predicament. As a recent study by the Cato Institute shows, a lot of the deficit problems stem from generous public employee compensation packages.

State and local governments face large budget deficits as revenues have stagnated and spending has remained at high levels. To reduce deficits, large savings can be found in the generous compensation packages of the nation’s 20 million state and local workers. In 2008, wages and benefits of $1.1 trillion accounted for half of total state and local government spending.

Cato's charts speak for themselves.

Part of the problem is that there are now more government workers than "goods producing workers" (construction, manufacturing, mining, agriculture) in the U.S. (source, h/t):

As John Carney and Kamelia Angelova (who produced the above chart) explain:

We've gone from providing jobs in profit-making private industry to providing jobs in profit-eating government work. Toward the end of 2007, the total number of government jobs exceeded the total number of goods producing jobs. Welcome to the government payroll economy.

January 4, 2010

Re: A New Year Begins...

Donald B. Hawthorne

Trying to effect change in Rhode Island at even the local level has been a monumental struggle with almost no success to show for it. Frankly, after years of trying, I have concluded it is not worth the effort.

I crossed the state border again this Fall, this time leaving Rhode Island permanently. I recommend it highly. It's relatively easy, too.

And it is liberating to rediscover that the need to fight the colossal failure that is Rhode Island is optional.

It appears that nothing will change until there is a total collapse. So let the rats go down with the Rhode Island ship. It's apparently the only possible way to get rid of them.

It's sad, isn't it? Because it did not (and does not) have to happen that way. Which is a common conclusion when looking retrospectively at crises.

December 28, 2009

Economy for Better and Worse

A sense of nervousness can be gleaned from the results, but the respondents also maintained the optimism that came to the fore in the summer 2009 survey. Many in the business community say that hopefulness is a byproduct of the feeling that Rhode Island can’t go much lower.

Things will get better because they always do. Right? The economy can't go much lower because it never has. It would be historic. Catastrophic. Well, I'm not predicting the end of the world, but the simple reality is that no economic mechanism of which I'm aware automatically kicks into gear when hard times top the Great Depression. Until we're hunting rats in the streets of Providence for food, the reality is that Rhode Island can go much lower.

Of course, one non-automatic mechanism that would help the state can be discerned in the survey's results: The pain could become so acute, and so clearly attributable, that state and local leaders will make it easier to live and do business in the state, lowering the unnecessary costs and lightening the misguided burdens that the state imposes with taxes, mandates, and regulations. A resolution by those whom Hasbro and Lifespan Chairman Alfred Verrecchia called "the collective leadership," in his keynote speech before the Rhode Island Public Expenditure Council, to set Rhode Island's economy free through rapid deregulation and dramatically shrunken government could make our state a bright spot in a dark region of a fading country.

The problem  the central flaw in Verricchia's reasoning and in the reform-by-consolidation movement to which he's contributed  is that the leadership class is going to do no such thing. Self-insulation and death-grip protection of special interests  coupled with the utter lack of a political price for their calamitous failures thus far  are going to keep RI's aristocrats marching along the same path, and the mechanisms of consolidation  moving government farther from the individual taxpaying voter, fiddling with the tax code without reducing its all-around burden, and paying out large sums to unelected administrators at the top  are all contrary to the prior necessity to end Rhode-apathy and cultivate a new collective leadership group that can wrest control of the government from incumbent hands.

December 24, 2009

Complications to Housing Recovery

Justin Katz

So, yesterday I mentioned some news that's sparking claims of a recovery:

U.S. home sales rose 7.4 percent in November, according to the National Association of Realtors, while in neighboring Massachusetts, the single-family sales spike mirrored that of Rhode Island, at about 60 percent.

The 11 percent slump in new home sales from October's pace shows that consumers are taking their time following an extension of a deadline for first-time buyers to qualify for a tax credit. The incentive, worth up to $8,000, was set to expire at the end of November. But Congress pushed back the date to April 30 and expanded the program to include current homeowners who move.

An index of demand for refinance loans dropped 10.1 percent and requests for loans to buy homes fell 11.6 percent last week.

The tax credit for buyers, by the way, has been extended almost to summer, and expanded to include wealthier consumers.

It looks as if November's increase in overall sales derived from folks who had set up their transactions to cash in on the tax credit before the end of the month, buying less expensive existing homes, and now that months have been added, the market has returned to wait-and-see mode. There are a number of economic angles to this scenario, but it takes an effort of imagination to discern a sustained economic recovery in it. Indeed, as the link related to new home sales puts it:

The results show how reliant the housing market has been on government assistance. About 2 million homebuyers have taken advantage of the tax credit of up to $8,000 for first-time buyers, the National Association of Realtors estimated this week. Another 2.4 million are expected to either tap that subsidy or another one for up to $6,500 for current homeowners.

The only way increased government spending is defensible as an economic solution is if it's a short-term boost predicated on a visible and pending boom in the private sphere or if the spending accompanies a dramatic change in regulation and such meant to grease the private sector machinery. What's currently happening is that the government is spending borrowed money through various incentive programs while complicating regulations, with everything from financial industry manipulation to the purchase of car companies to cap-and-trade to the healthcare monstrosity.

The bill on both the borrowing and the complications is going to come due, and when that happens... well, I'm not inclined to imagine the outcome too vividly on the day before Christmas.

December 23, 2009

Impressions from a Declining Country

Justin Katz

Sometimes the order in which one processes information can create broader impressions than the individual items suggest. For just such an experience, first watch Steven Crowder's short video about the crumbling, desolate city of Detroit, whose condition he attributes to the loving manipulations of big government.

Almost two months ago, the Commerce Department cheered the announcement that the third quarter GDP had grown at an annualized rate of 3.5%. The Obama administration hailed it as a sign that their economic policies had spurred real growth. Even when Commerce sharply revised the number downward a month later to 2.8%, the White House continued to argue that the lower number still meant that the US had turned the corner, even after a number of critics asked how Commerce could have missed the number so widely. ...

Today, Commerce backtracked even further. The annualized growth number for Q3 turns out to have been 2.2%, a revision of over a third from its original estimate two months ago...

... The Cash for Clunkers program and the first-time homebuyer tax credit was estimated to have contributed as much as half of the original Commerce estimate of 3.5%. Assuming that to still have contributed at least 1.5% of the final GDP, that leaves a rather pathetic 0.7% growth in Q3 without it. It's barely a recovery at that level.

November saw a dramatic increase in the number of houses sold in Rhode Island  up 61.1 percent compared with November 2008, according to statistics compiled by the Rhode Island Association of Realtors.

Part of the increase can be explained by a one-month-only $8,000 tax credit that expired at the end of November. Part of it may be related to the false prediction of growth. No doubt, there's also a genuine improvement of buyer mood; people who have been in the market for a home are more comfortable with the probability that prices are at or near their new bottom and that interest rates aren't going any lower. University of Rhode Island Economics Professor Len Lardaro puts it thus: "we're [now] in a typical recession, not a free-fall, like we were in a year ago."

Nowhere, however, has anybody explained what specifically is going to turn things around. Even up to the Commerce Department, it seems as if economic forecasts are taking as an assumption that 4% or so is simply "normal" growth, to which the economy will return as a function of its essential nature. The picture that is actually beginning to emerge more resembles an old car, and all variety of government officials, economists, and media cheerleaders are standing around trying various tricks and gimmicks to get the beast moving  not the least by employing positive thinking: "It's just about to go, now!" It whines and whirs and sputters, but it isn't turning over. And it's cold outside.

Of course, economic movement is only necessary for certain destinations. We can trust, for example, that Detroit will come to us. Rhode Islanders should be especially aware of the fact that, by contrast, economic turnaround and improvement must be pursued, not awaited

December 20, 2009

The Cost of Eliminating Prices

Justin Katz

If you're looking for some worthwhile snowed-in reading, Kevin Williamson's recent National Review essay, "Priceless Is Worthless," would be an edifying use of your time. In sum:

... as we continue to pretend that there is another unseen economic reality beyond market prices when it comes to health care, banking, housing, labor, cotton, sugar, fuel-efficient Japanese automobiles, solar panels, and every other product with prices distorted by politics--whose interests do you imagine are being served? Yours, chump?

A timely example:

Health-care prices are a mishmash for lots of reasons, but one of the main ones is the way we pay for health care--you don't pay the doctor, your insurance company does, an arrangement that gives at least two of the three parties involved a good incentive to obscure prices, so that the consumer has no idea how good or how rotten a deal he is getting while the insurers and hospitals attempt to game and swindle each other. Given the shocking and terrifying size of serious medical bills--my mother's last stay in the hospital billed out at $360,000 (that's a Ferrari 612 Scaglietti for Doc X plus a BMW 5-Series for one of his brats)--the American health-care consumer, quaking in his paper hospital slippers, no longer even asks: "What does this procedure cost?" He only asks: "Does my insurance cover it?" No prices, no negotiation, no mystical coordination between producer and consumer--instead, maddening and expensive and often underhanded mediation by the insurer.

Medicine is complicated; computers are complicated, too, but you can call Dell or Apple or Best Buy or whomever and ask: "What does this sort of computer cost?" and you will receive an answer. And then, when you get to the store--miracle of miracles!--that will be the price. Computers are damned complicated to make, with programmers in the United States and India collaborating with Taiwanese microchip fabricators, Dutch LED manufacturers, Irish customer-support agents, etc. You can get a price on an iMac, but you can't get a price quote on an ingrown toenail.

December 19, 2009

This Is About Self-Dealing, Not National Economic Health

Justin Katz

The Democrats are clearly in grabbing mode, and this sort of thing is not going to stop until we citizens of the United States make it stop:

President Barack Obama's Democratic allies in the House Wednesday muscled through a year-end plan to create jobs, mixing about $50 billion for public works projects with another almost $50 billion for cash-strapped state and local governments.

The unemployed would get continued benefits. But conspicuously absent from the plan were Obama's recently announced initiatives to give Social Security recipients $250 payments, a tax credit for small businesses that create jobs, and a program awarding tax credits to people who make their homes more energy-efficient.

This is all about the government and public bureaucracies preserving themselves at the expense of national economic health, rewarding special interests, and expanding dependencies.

It's worth noting, too, that although no Republicans voted for this particular legislation, there's little reason to believe that all, or even many, of them will allow small government principles to stand in the way of their own benefit should they return to power. The political class requires wholesale revision.

December 15, 2009

Facilitating Opportunity Is the Path to Charity

Justin Katz

ReviewingCreating an Opportunity Society, by Ron Haskins and Isabel Sawhill, Duncan Currie emphasizes that advocates for the poor (and such) focus on the wrong measure of social progress:

Mobility, not inequality, is the key indicator of economic opportunity. The two are not necessarily correlated: If income inequality has gone up since the early 1980s, that doesn't necessarily mean income mobility has gone down. Indeed, a 2007 Treasury Department study concluded that "relative income mobility has neither increased nor decreased over the past 20 years." ...

[Haskins and Sawhill] advocate a three-pronged strategy for boosting mobility: Improve public education, encourage work, and strengthen families [especially by reining in the surge in nonmarital births].

This argument runs right along the line that divides the modern American left and right (at least those on either side who are socially conscious). On the left, the the thread across the three strategic issues is government-directed action. Not trusting the masses to contrive a fair system, progressives wish to utilize the Smart Class to lay out a plan that the government can then implement objectively. On the right, we're a bit less convinced of mankind's capacity, first, to comprehend all of the necessary variables that an all-encompassing plan must consider and, then, to collect and apply the dictatorial force necessary without corrupting those who must perform the implementation.

And so, focusing on the conservative side of the comparison, the keys to strengthening public education are liberty and choice  giving those closest to the children (especially their parents) as much room as possible to determine the best focus and structure for educating them. The keys to encouraging work are to maximize incentive by removing long-term handouts and to ease the path from concept to profit  removing regulations and other restrictions that keep prices up and competition down. The keys to strengthening families are to be clear about the ways in which various relationships are similar and different and, with an emphasis on cultural institutions, to encourage the behavior appropriate to each  or, conversely, to encourage those inclined to a particular behavior toward the appropriate relationship types.

It is patently false to accuse those who agree with the preceding paragraph of not caring for people in need. Indeed, it is long overdue for naturally conservative groups, such as the Roman Catholic Church, to take the longer view, which is more in keeping with notions of individual autonomy.

December 4, 2009

This Is the Critical Issue for the State

Justin Katz

One more statistic to paste into our collage of problems facing the state, all of which point to the same conclusion:

The Mortgage Bankers Association, which compiles the most comprehensive statistics on mortgage loan performance nationwide, also had grim numbers for Rhode Island in the third quarter of the year, the months of July, August and September. The association, which bases its statistic on a nationwide survey of 44 million mortgages serviced by banks, credit union, mortgage companies and other institutions, reported that 10.25 percent of Rhode Island's mortgages are 30 days or more past due. That's the record high since the association began keeping records in 1972, according to spokeswoman Carolyn Kemp.

And here's a bucket of cold water on the foreclosure side:

Looked at a different way, the middle-class Rhode Island suburb of Warwick has a rate -- 8.4 -- that is higher than a slew of aging Massachusetts factory communities, such as Worcester, 6.4; Fitchburg, 5.9; Lowell, 5.83; Springfield, 5.7, and Fall River, 5.3.

Warwick has about a 60% higher foreclosure rate than Fall River. How long, I wonder, until the entire state of Rhode Island becomes available for eminent domain seizure on the grounds that it's blighted?

Rhode Island needs jobs. It needs them quickly, and it needs them in large quantities. Tinkering with "targeted policies" isn't going to do it. Fiddling whith "this receipts tax" and "that receipts tax" gimmicks isn't going to do it. The state needs to cut taxes, remove mandates, and erase regulations.

If RI House Speaker Bill Murphy wants to cheerlead to promote the state, we'll get him some pom-poms and a little skirt, but he'll be performing to empty bleachers unless the message is "we're changing for your benefit." The hard part is that the change has to be credible, and that'll prove a difficult sell if we have the same people at the State House who have cheered us into the ground.

November 23, 2009

Cuts Better Than Spending

Our results suggest that tax cuts are more expansionary than spending increases in the cases of a fiscal stimulus. Based upon these correlations we would argue that the current stimulus package in the US is too much tilted in the direction of spending rather than tax cuts. For fiscal adjustments we show that spending cuts are much more effective than tax increases in stabilizing the debt and avoiding economic downturns. In fact, we uncover several episodes in which spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions. We also investigate which components of taxes and spending affect the economy more in these large episodes and we try uncover channels running through private consumption and/or investment.

The irreducible bottom line is that the government is a burden and a drag on the economy. In some contexts, it's worth the cost, but when it comes to affecting the economy, we're better off lightening the burden  whether we're talking the United States or Rhode Island. (And that's not even getting into regulations and mandates.)

ProJo Comments on RI Invisible Districts

Marc Comtois

Six days after I noted the new congressional districts in RI, the ProJo has taken notice and did some digging:

We weren't sure who to call to clarify the confusion.

"We do not know who represents the 86th and 5th Congressional Districts," Governor Carcieri spokeswoman Amy Kempe told Political Scene with a chuckle. "Unfortunately, I don't have those phone numbers for you."

The phantom districts here and elsewhere were part of a national embarrassment for the Obama administration that was ultimately attributed to a glitch in the reporting system. Virtually all data on the site are posted by grant recipients, which range from state governments to universities to private contractors.

Congressional District 5 was actually a company headquartered in Massachusetts' 5th District doing work in Rhode Island, according to the governor's office. District 00 represents money entered by the state reflecting crime victim compensation funding and a security grant.

And 86 "appears to be the Providence Housing Authority," Kempe told Political Scene. "We don't know how or why that happened," she said.

Just clerical errors. I'm sure that'll never happen with government run health care.

“I am noticing that each of your plans to save money involves spending even more money.”

Health care "reform" is but the latest example--cuts and taxes will kick in immediately while benefits will start in 2013, for instance. And the promised savings are dubious anyway. For instance, the plan actually shifts Medicare costs onto the states, forcing them to deal with finding additional revenue (tax increases?) to handle the additional burden mandated by the federal health care "reform" plan.

November 22, 2009

The Green Religion and Expensive Government

Justin Katz

Just wanted to mark this final stage in the incremental establishment of the green religion as the official doctrine of the land:

New major public projects and building renovations in Rhode Island, including schools, must be designed and constructed in conformance with high-performance green-building standards, according to legislation signed by Governor Carcieri.

The law applies to new construction of more than 5,000 square feet and renovation of spaces greater than 10,000 square feet if such projects receive funding from the state. The law takes effect immediately but will apply only to buildings entering the design phase after Jan. 1. Under the law, building design must conform to the internationally recognized United States Green Building Council Leadership in Energy and Environmental Design rating system or an equivalent high-performance green-building standard, including the Northeast Collaborative for High-Performance Schools Protocol.

It almost reads like a comedic one-liner when Senator Louis DiPalma (D, East Bay Gerrymander) explains that "green building materials and systems [are] more affordable and available [...] than they used to be." Badum-bum. He goes on to assert that the investment "pays off in lower costs for energy, water and more over the life of a building," but if that's true, then the communities and organizations funding applicable projects should be easily persuaded without a state mandate.

To review: Our state is in the middle of a fiscal crisis, bleeding jobs for years on end; our government has structural deficits in the hundreds of millions in good times and bad; our communities are struggling to maintain the services that they provide; and the General Assembly and governor thought this would be an appropriate time to mandate a greater price tag on investments in public construction.

November 21, 2009

A Deadly Scheme

Justin Katz

Henry Aaron and Isabel Sawhill, of the Brookings Institute, provide a wonderful example of the insanity of allowing individuals to plan large segments of the economy:

So here is what we propose: Congress should enact a value-added tax, the equivalent of a broad-based sales tax on all goods and services. It should take effect only after unemployment has fallen to a predetermined level or in, say, five years, whichever comes first. Congress should link revenue from the new tax and other sources directly to public healthcare spending through a newly created healthcare trust fund. The trust fund would pay for all federal healthcare spending. This framework would mean that Americans would get the healthcare they are willing to pay for. If spending outpaces projections, Congress will have to choose between raising taxes and finding ways to slow the growth of spending.

By balancing revenue and healthcare spending, such a reform would help solve America’s long-term fiscal problems. In the near term, it would also support and sustain the economic recovery. Consumers would be encouraged to buy now, before the tax takes effect. And by showing financial markets that Congress is determined to put our fiscal household in order, it would help keep interest rates low and encourage investment. The trust fund mechanism would strengthen incentives to institute reforms that will actually bend the healthcare cost curve, because measures to slow the growth of healthcare spending would avoid unpopular future tax increases that would otherwise be necessary.

How is it possible that people who are paid, essentially, to think can argue that a looming tax increase equivalent to one-sixth of the U.S. economy will encourage consumers to splurge while the splurging's good without making the parallel assessment that the huge taxes will suppress the economy once implemented? One of the reasons given in a previous paragraph for rejigging the healthcare system in a public direction is that, with ever-improving "medical interventions... [p]atients will insist on having them." Well, if the government must thus bend to supply what patients demand, why won't consumers learn the lesson and start demanding the things for which Aaron and Sawhill assume they'll splurge?

This program  which one may suspect will be the end result of the Democrats' healthcare path  would be a recipe for the hollowing and destruction of the United States of America, beginning with its entrepreneurial soul.

November 20, 2009

Republicans Less Likely to be Unemployed

Data from Rasmussen Reports national telephone surveys shows that 15.0% of Democrats in the workforce are currently unemployed and looking for a job. Among adults not affiliated with either major party, that number is 15.6% while just 9.9% of Republicans are in the same situation....The percentage of unemployed Democrats has grown less than a point from 14.2% in February....Among those not affiliated with either major party, unemployment has grown by more than two percentage points from 13.3% in February to 15.6% now.

As for Republicans, the percentage unemployed has also grown more than two points after starting at just 7.8% in February.

Looking at this map and comparing it to what we know about the usual red/blue breakdown might add some clarification. I'm not sure, but interesting.

November 16, 2009

The Economy as Trojan Horse

Justin Katz

It's Political Maneuvering 101 to encase your preferred issues within a popular Trojan Horse. So, if green is what you mean, declare its ability to end joblessness. However pretty a landscape that may paint, though, it's of questionable accuracy:

Green technology may help drive an economic recovery in New England but the fledgling industry will not be a major engine of growth for the region in the foreseeable future, economists said at a recent conference.

The sobering assessment came during the New England Economic Partnership's fall conference, which was held last week in Boston and focused on so-called "green-collar jobs" and whether their creation will help pull Rhode Island and its neighbors out of recession.

The real hope for "green jobs" is that a particular state will become the hub of the industry. The problem is that  as is typical of politicians  the opportunity is so obvious that multiple states are competing for the title. Government operatives are good at innovating by fad, but business people survive by innovating, period.

States  and I'm speaking mainly to Rhode Island, here  should ease regulations across the board and otherwise refurbish the track along which the economy runs and let investors and corporate types discern which has the environment most conducive to their industries.

October 30, 2009

A Black Spot in the Northeast

Justin Katz

Rhode Island's saving grace, on this sort of graphic showing state-by-state unemployment rates, is that the folks creating the images continue to use "higher than 10%" as the top category. So, a baker's dozen of other states have joined us in that group, but conspicuously, none of them are north of the Carolinas or east of Ohio. We're a little black dot in a sea of purples and maroons.

Imagine what would happen if we made a concerted effort to shed our business unfriendly image... instead of continuing to elect legislators who are apparently intent on pushing us in the other direction.

October 26, 2009

If GM and Chrysler Don’t Make It, Well That Was the Plan All Along

Remember those big auto bailouts? Did you know they were never really intended to save Chrysler or GM? At least that’s what Newsweek Senior Editor Dainel Gross says (h/t Mickey Kaus)…

By the time the government got there, the companies had essentially failed. A year ago, the choice facing the bondholders, shareholders, and executives of GM, Chrysler, Citigroup, and, to a lesser degree, Bank of America, wasn't between accepting government help or accepting the offer of other suitors; it was between Washington, D.C., and liquidation....Sure, there was brave talk of reviving these once-proud brands and returning them to their rightful place in the pantheon of American corporations. But from the outset, I've believed that the interventions were simply efforts to delay liquidation rather than to avert it altogether, to provide a breathing space in which managers could find homes for valuable assets (other companies) and find chumps to absorb the losses from bad decisions (that would be the taxpayers)....

It's frustrating for taxpayers that the banks and car companies in which they have stakes aren't performing better. But Washington isn't to blame for the change in the competitive landscape. The struggling companies we now own are taking losses because, for years, they engaged in the types of business practices that cause businesses in their industries to lose market share and rack up losses—and to seek government help.

Apparently, Gross’ sources aren’t betting on GM or Chrysler becoming profitable again, ever. And the bankruptcy of a government-owned manufacturer, the event that will bring an unevadable public challenge to progressive economic ideas of more government and more spending being solutions to everything, continues to draw closer and closer…

October 25, 2009

White House Acknowledges Economic Reality?

Christina Romer, the chair of President Barack Obama's Council of Economic Advisers, said the initial jolt of the $787 billion stimulus expanded the economy in the second and third quarters of this year. But she said the remaining spending will simply keep the economy from slipping.

In other words, shoving money into the economy expanded it to fit the new dollars, and that spurt must become a constant flow in order to maintain the size of the economy. Of course, to the extent that the new money was borrowed, it will have to be repaid out of the economy (with interest), and to the extent that the new money was printed, it will deflate in value.

The sooner we let the economy return to an unstimulated state, the less the bill will be when it comes due. The economy should be encouraged, through policy changes, to grow on its own.

October 21, 2009

Passing Laws Without Legislators

Justin Katz

Anybody catch the following in a Sunday Projo article about yet another economy-restricting practice?

The solution he refers to is the Home Valuation Code of Conduct, a set of standards for residential real estate appraisals that grew out of an investigation of the mortgage industry by New York Attorney General Andrew M. Cuomo. The code seeks to guarantee the independence of appraisals by building a "firewall" that prevents mortgage brokers from dealing directly with appraisers.

In exchange for being removed from Cuomo's investigation, mortgage giants Fannie Mae and Freddie Mac agreed they would not buy mortgages whose appraisals did not adhere to the code. The two government-sanctioned corporations buy individual mortgages, collect them into packages and sell the packaged mortgages to investors. The code took effect May 1.

Although the rules are not binding on anyone but Fannie Mae and Freddie Mac, lenders follow them because, if they didn't, they would not be able to sell their loans to the two companies. Because of their size, Fannie Mae and Freddie Mac can drive what happens in the mortgage industry. "Once Fannie does something, everybody else kind of jumps on board," says [Keith White Jr., owner of White Appraisal Co. in Warwick].

Without any legislation's being passed or even, presumably, proposed, the mechanism of leveraging huge, government-backed lenders has imposed new, costly regulations on the housing market. One can see how a similar principle might result in the proliferation of  oh, I don't know  derivatives based on insecure loans granted to lower-income borrowers and crash the economy.

The new policies, by the way, add two layers to produce that "firewall." One wonders what an investigation of names and relationships branching between those layers and various government officials might uncover.

October 18, 2009

Small States, Lost Income

Justin Katz

Duncan Currie tells a tale of economic happenings in my childhood state of New Jersey that should ring familiar to Rhode Islanders:

Hughes, Seneca, and Irving estimated that, between 2000 and 2005, net domestic out-migration cost the state a total of $7.9 billion in adjusted gross income. "Although this loss is relatively small--3.3 percent of total adjusted gross income in 2005--it is a permanent loss that will persist (or increase) each year unless net out-migration is reduced or eliminated," they wrote. ...

One need not be a demography expert to understand why New Jersey is hemorrhaging human capital. According to according to state rankings compiled by the Tax Foundation, it now has the highest state and local tax burden, the highest per capita property taxes, and the worst tax climate for business. The Pacific Research Institute's latest U.S. Economic Freedom Index says that only two states (Rhode Island and New York) offer less economic freedom. The 2009 State Economic Outlook Index, co-authored by legendary economist Arthur Laffer and published by the American Legislative Exchange Council, ranks New Jersey 46th. Democratic governor Jon Corzine recently suspended property-tax rebates for most New Jerseyans and raised the state's upper individual income-tax rates to help close a yawning budget gap. New Jersey's uppermost rate (10.75 percent) is now higher than California's (10.55 percent).

Readers will recognize the measure of economic health as one that I've been tracking, in our state, for a couple of years. The dark topic aside, it's nice to see my concern about lost AGI echoed by real scholars  especially after the unions' favorite analyst (and regular Projo opinion-page contributor), Tom Sgouros, called such a measurement "farcical." I'll concede that, when it comes to that particular adjective, he may be an expert.

October 16, 2009

Just like a banana republic

Today the Obama administration's "pay czar" demanded that Ken Lewis, Chairman of the Board of Bank of America, work for free. The "czar," Kenneth Feinberg, pressured Lewis not only to forgo all remaining compensation for 2009, but to repay the $1 million he has already received this year. Lewis acquiesced, saying that "he felt it was not in the best interest of Bank of America for him to get involved in a dispute with the paymaster." I'm sure he was right about that.

Response to this outrage has been surprisingly muted. In my view, it is hard to imagine anything more un-American than a "pay czar" empowered to order businessmen to work for free.

The main point here is not sympathy for Mr. Lewis, although I am, in fact, sympathetic to him. He is about to retire and will receive a substantial retirement package--only, perhaps, because the pay czar lacked jurisdiction to negate it. But the idea of empowering the federal government to dictate businessmen's compensation based on political favoritism is absolutely chilling.

This episode illustrates the problem perfectly. Lewis took on the federal government by testifying that Fed chief Ben Bernanke and Henry Paulson, a Democrat who was then Secretary of the Treasury, bullied him into committing what was, in effect, an egregious violation of the securities laws. Bank of America was due to close on its purchase of Merrill Lynch, and Lewis knew that Merrill's value was plummeting. Lewis testified under oath that Paulson and Bernanke threatened to fire the entire management and board of Bank of America, including Lewis, if Lewis backed out of the Merrill deal or communicated to the bank's shareholders what a bad deal the purchase had become.

So, according to Lewis, the federal government forced him to violate his duty to his shareholders in order to advance the government's objectives. The feds were unhappy with Lewis's blowing the whistle on their actions, which I believe would have been criminal if carried out by private citizens. Bernanke, at least, denied Lewis's version of events.

So Lewis took on the feds, and now he's paying the price. The Obama administration has taken away his entire salary for 2009. Political payback, or just a coincidence? In a banana republic, you never know.

Where is the outrage from those who love liberty? In a banana republic, your "freedom" only lasts as long as you are favored by those in power. Some definition of freedom; it is certainly not the historic definition in America.

College Isn't Required to Earn a Good Living

Marc Comtois

Two stories in last week's ProJo have been jangling around in my head. Then Justin noted Deborah Gist's "anger" over kids not wanting to go to college and, correctly, pointed out that college ain't for everyone. I agree, especially when the value of a B.A. seems to be less and less while we pay more and more. The first story that caught my attention last week was that the RI Board of Governors for Higher Education raised tuition and fees by almost 10% at URI, RIC and CCRI, continuing a trend. Yet, Rhode Island isn't alone, it's a national problem. One cause of these increases is what's called the "cookie monster" effect, says Ronald Ehrenberg, who directs the Higher Education Research Institute at Cornell University.

October 5, 2009

The Looming Challenge for the Advancement of Euro-Style Soft-Socialism in America…

Carroll Andrew Morse

…is most likely to come from the automobile industry. Did anyone else note the statistics related to automobile sales released at the end of last week (via Reuters, in the excerpt below)…

U.S. auto sales tumbled by 23 percent in September as showrooms emptied after the government-funded boom from the "cash for clunkers" program, with General Motors Co and Chrysler hardest-hit.

Sales for General Motors Co and Chrysler -- the two U.S. automakers struggling to regain momentum after emerging from bankruptcy -- dropped by 45 percent and 42 percent, respectively.

Ford -- the only U.S. automaker to have avoided bankruptcy -- managed to hold its sales decline to 5 percent from a year earlier despite low inventories and reduced incentives for car shoppers.

Assuming that Reuters is presenting an apples-to-apples comparison with Ford, the GM and Chrysler percentages would be one-month totals compared to the prior year.

General Motors and Chrysler, you may recall took copious amounts of bailout money from the government -- along with copious government conditions attached -- as part of the Obama administration's economic program, which is premised largely on the idea that businesses run better when they are more aggressively regulated or directly managed by the government.

So what will be the response, if government-ownership fails in a major industry? Will advocates of government planning of the economy begin to accept that government ownership of something doesn't provide an exemption from the laws of economics, and actually look for the underlying sources of GM's troubles, instead of blithely assuming that government ownership solves them whatever they are? Will they double-down and say the problem with the auto bailout was that the amount of taxpayer money was too small and that more bailout money is needed?

Or will they say that looking that GM and Chrysler's success in conventional business terms (was more taken in than was spent) is just a distraction, and the important thing is that government has more control than it did before?

September 18, 2009

The Obama MO?

Justin Katz

With the economy at best slowing its wobble (and reason to be wary even about that), the Obama administration has added requirements for "better gas mileage for cars and trucks and the first-ever rules on vehicle greenhouse gas emissions" to its list of desired drags thereon. Note this now-familiar feature:

The proposal will cover vehicle model years 2012 through 2016, allowing auto companies to comply at once with all federal requirements as well as standards pushed by California and about a dozen other states.

Now, I'm sure there are a whole lot of arguments that one could put forward, with respect to time for such things as research and marketing plans, but a growing fist of expensive programs seem slated to swing by during the millennium's teens  after the next presidential election.

I'd also highlight this:

The administration estimated the requirements would cost up to $1,300 per new vehicle by 2016. It would take just three years to pay off that investment, the government estimates, and the standards would save owners more than $3,000 over the life of their vehicle through better gas mileage.

Except for the fact that gas will increase in price as it adjusts for the lower demand...